The paper looks at the various financial mechanisms initiated by the European Union (EU) to safeguard the Eurozone in the time of extraordinary crisis due to the coronavirus epidemic. It analyses the responses of the member-states towards these stimulus packages and the resurgence of the debate on the North-South divide. Confronted with unprecedented social and economic challenges, countries are prioritising their own citizens. Given this scenario - the paper looks at how EU is responding to what has been called as the worst global crisis since the Second World War.
“I have been extremely disappointed by the European response to COVID-19... I arrived at the European Research Council(ERC)a fervent supporter of the EU [but] the COVID-19 crisis completely changed my views”,[i] wrote Mauro Ferrari, the EU’s chief scientist and head of the ERC in his resignation letter, highlighting the frustrations with the EU’s handling of the pandemic. These sentiments have found resonance across Europe, where several member states have registered their frustrations with the EU,which has limited capacity and authority to handle health-care issues.
Europe has emerged to be as the hotspot for spread of coronavirus with countries like Spain and Italy registering the maximum number of cases and deaths. The crisis has led European economies spiralling towards new downturns amid massive lockdowns. With several forecasters predicting the European GDP to shrink by 10%, the Eurozone is facing its worst crisis since its inception. So far, the region has been accused of a slow political response to the crisis with various debates emerging on how best to tackle the economic backlash of coronavirus, with member states turning against one another, and prioritising their own national policies. The European Union has come out with various stimulus packages to cushion the Eurozone economy from the effects of coronavirus pandemic but it has been deemed limited. The divisions have emerged over the use of the stimulus package, conditions attached to the ESM credit line and most importantly on issue of pooling of debt through issuance of joint bonds, which is an anathema for the Northern member states like Germany, the Netherlands etc. This has rehashed the North-South divide over the debt management within the Eurozone.The paper looks at various financial mechanisms initiated by the EU to safeguard the Eurozone. It also looks at the various debates relating to North-South divide over how best to manage the economic fallout as a result of the COVID-19 crisis.
Financial Mechanisms Initiated
EU’s response to mitigating COVID-19 impact focuses on four key priorities: first, limiting the spread of the virus; second, ensuring provision of medical equipment; third, promoting research for vaccine; and fourth, supporting jobs and economy.[ii]A lot of EU-level financial structures have also been reformed to help the economies fight this pandemic. Several state aid regulations have been eased so that member states can subsidise businesses hit by the crisis and the lockdowns. Another key initiative taken by the Eurozone leaders is the temporary suspension on the overall size of government debt, allowing spending beyond the usual admissible limits. Following are the financial mechanisms initiated by the Union.
The European Commission (EC) on 13 March 2020 announced[iii] the first economic stimulus package to mitigate the impact of the crisis. One of the most important measures taken was to facilitate immediate relief for the medium and small scale industries through a€1 billion fund from the EU budget as a guarantee to the European Investment Fund (EIF). This fund would be channelled through various instruments under the EIF programmes. Second was the “Coronavirus Response Investment Initiative” (CRII). Under this, the “ECproposed to direct €37 billion under the cohesion policy to the COVID-19 outbreak”. The crucial step taken under this initiative was to relinquish its obligation “request the refunding of the un-spent financing for the European structural and investment funds that are with the member states”. This amountof about €8 billion will help the member states to supplement €29 billion available under EU’s structural funding and expected to support the health care systems in the member states. The states can use these funds to bolster their equipment, medicines, testing and treatment facilities etc. They can also use these funds to provide liquidity to their SMEs, or to handle short-term financial shocks by covering the working capital of these enterprises. Also, the ECproposed to extend the scope of the EU Solidarity Fund to include public health sector within its expanded scope. Under this Solidarity Fund, up to €800 million were madeaccessible for 2020. To support the dismissed workers and self-employed, the European Globalisation Adjustment Fund of up to €179 millionwould also be initiated.[iv]
On 19 March 2020, the EC adopted a Temporary Framework which is aimed to supplement the member states’ fight against coronavirus by giving them flexibility as foreseen under “state aid rules”. The idea is to provide businesses enough liquidity to keep them operating or to freeze their operations temporarily without jeopardising the sanctity of the single market. It envisions five types of aids that are available to the member states -“first, set up grants or tax advantageof up to €800,000 to a company; second, to give subsidised state guarantees on bank loans; third,subsidised interest rates for public and private loans; fourth, to use banks’ existing lending capacities, and use them as a channel for support to businesses – particularlySMEs.The Temporary Framework makes it clear that such aid is direct aid to the banks’ customers and not to the banks themselves; and fifth, to introduction of additional flexibility for short-term export credit insurance to be provided by the state where needed”.[v]
The European Central Bank (ECB) also launched an emergency €750 billion as its“whatever it takes”plancalled the Pandemic Emergency Purchase Programme (PEPP). The idea is to buy the government and corporate debt across the Eurozone in a “flexible manner” to spread the money among countries in need. The program took immediate effect and is expected to remain in force till end of 2020. The €750 billion comes in addition to the €120 billion measure, includingthe existent €20 billion-a-month bond-buying program. This is the largest monetary stimulus package envisaged by the ECB in a nine-month span[vi].
On 9 April 2020, EU finance ministers approved one of the biggest stimulus plans of €540 billion to support the coronavirus stricken economies. It included measures to back the workers, businesses and states in their fight to keep their economies afloat. Central to this stimulus is the rescue package that involves the European Stability Mechanism (ESM), a bailout fund that was created during the EU’s Eurozone debt crisis. The ESM would make €240 billion of €540 billion available for indebted countries like Italy, Spain etc.Themajor requirement to access to this fund is that it must be used directly or directly for health care, cure and prevention related costs. Also, the EU ministers approved €200 billion in loans from the European Investment Bank (EIB) for EU businesses and a €100 billion jobs support program that was proposed k by the EC on 2 April 2020.[vii]Taken together, the total fiscal response to mitigate coronavirus impact on European economies stands at €3.2 trillion, largest in the world so far.[viii]
Reacting to the stimulus packages, Spain and Italy, the two countries hardest hit by the pandemic, said that these stimulus packages are not enough to tackle the crisis. The Spanish Prime Minister Pedro Sánchez called for “a new debt mutualisation mechanism”, as part of a Marshall Plan for Europe, an equivalent to the post-war economic reconstruction plan that enabled the continent to recover from Second World War. He said “if the virus makes no halt for borders, then financing mechanisms cannot do this either…Cracks between North and South should be avoided. Nobody is to be left to fend for themselves. These are particularly difficult times, which require bold decisions. Millions of Europeans believe in the Union’s project. We must not disappoint them. Let’s give them reasons to continue to trust us. It is now or never, because the future of Europe is at stake”.[ix]Reacting to the negotiations of the packages, Spain’s Economy Minister Nadia Calviño warned that offering credit lines would not be enough. She added that Spain would accept it only as a “transitory” solution, to give “a first signal” to the markets about the will to work on a European solution.
The Italian Prime Minster Giuseppe Conte has said he will not agree to the deal unless it includes a way to share debt among members. The Italian government has been very vocal in its opposition to the idea of loans through ESM as it does not want debt criteria, conditionalities and deficit limits attached to it. The Italian government believes that the pandemic is hitting every EU nation and that no member states should be put through strict conditions in exchange for financial support. In an interview to BBC on 9 April 2020, Prime Minister Conte said, “the European Union risks failing as a project in the coronavirus crisis…the EU must act in an adequate and co-ordinated way to help countries worst hit by the virus”, adding that “it (coronavirus pandemic) is an economic and social emergency that was testing the financial structure of every country.”[x]
Emerging North-South Faultlines
These stimulus packages come amid reports of Europe looking at its worst recession period since the Second World War. France officially slid into recession after its economy shrunk by 6% in the first quarter of 2020, the maximum in almost fifty years. German economy is expected to shrink by 10% in the second quarter of 2020, Italy by 9.6%, Spain by 8.9%, and the Eurozone expected to shrink by 13% in 2020 pushing the continent towards deep recession.[xi] The coronavirus pandemic has exposed the faultlines within Europe, with the member states arguing over how to deal with the economic fallout. They have been at loggerheads with each other and with the EU over the issue of coping with the economic slow-down due to the coronavirus pandemic. The divisions have its roots in the 2008 financial crisis where the contentions emerged that the wealthy northern countries contribute more to the bloc’s finances than the poorer Southern states. However, in periods of crisis, such as the present one, richer member states resent subsidising the less wealthy countries, while the poorer states resent the greater influence wielded by the richer ones.[xii]
The negotiations on the EU’s fiscal packages for the pandemic has highlighted the divisions between north and south and have led to rising debates as was experienced during the financial crisis of 2008-09. There were two major issues of debate during the negotiations – first stemmed from divergent points of view on the conditionalities attached to the access of funds and loans under ESM. During the current negotiations, deeper divisions were exposed between the northern and southern European countries with the Netherlands in favour of tougher economic conditionalities for the receiving countries. The Dutch government wanted conditionalities to look at specificity of each country and was also sceptical about “whether recipients would use the money responsibly, and their ability to stick credibly to a repayment timetable.”[xiii]Hardest hit countries like Italy, on the other hand, opposed this measure and wanted these conditionalities to be as minimum as possible so that it is cheaper for them to cover the economic damage. However, the issue was resolved after the scope of how the ESM funds were to be used were limited to covering health-related expenses in response to the coronavirus, directly or indirectly and each member state will be able to request a credit of up to 2% of its GDP.
Second major debate was related to the issuance of joint European debt, i.e. coronabonds. This issue has remained unresolved as the member states were unable to overcome their differences.The proponents of coronabonds were Greece, Spain, Portugal, Ireland, Belgium, France, Slovenia, Luxembourg and Italy. The opposition comes from the Frugal Four of fiscally conservative EU countries - the Netherlands, Finland, Austria and Germany.
There were growing expectations that the EU would agree on a massive financial response as it was not just the indebted countries suffering from the economic fallout but the larger economies were expected to shrink as well. Although the finance ministers agreed on the largest ever bailout programme, they were unable to arrive on consensus regarding the distribution of loans and how to use the bailout fund. However, the biggest disappointment from the meeting was on the issue of coronabonds – almost 9 countries of total 19 in the Eurozone proposed the idea to issue joint-bonds, i.e. mutualised debt that all Eurozone nations would help pay-off. Countries in Southern Europe, led by France, Spain, and Italy, had called for a common response to the challenge, such as a “massive Eurobondunderwritten by richer and less rich countries alike to better share the pain”. Even Christine Lagarde, the head of the European Central Bank (ECB), has called upon“Europe to step up and do what it’s never done before”[xiv] and had been pushing the heads of governments and finance ministers to adopt an instrument that had been discussed during the Euro crisis: Eurobonds.
The key obstacle in agreement on coronabond is that during the 2008 economic crisis, the EU paid Greece and other four countries massive bail-out packages but with harsh austerity measures attached. It was meant to ensure that no member state will seek bailouts opportunistically in future. However, this time, the countries are demanding the issuance of joint-bonds without any strings attached, making it impossible for the Northern states to accept. The issuance of coronabonds would make the borrowing cost expensive for the northern member states due to shared liability, while making it cheaper for the rest of the Eurozone members.[xv]
The stakes for the EU are huge, as in the short term, this crisis can lead to an economic collapse in Southern Europe on an unprecedented scale with almost entire businesses in a shut-down mode and borrowing costs higher than countries in the North, limiting the states’ capacity to deal with the crisis. In the long-term, this lack of solidarity from the Northern states can rehash the older arguments and debates regarding the difference of approaches within the EU.
The finance ministers are under severe pressure to present a deal as soon as possible as there are rising concerns that their divisions are going to fuel anti-EU sentiment across the bloc. It needs to be mentioned that the hardest hit nations are also the ones with largest debts – Italy’s debt-to-GDP ratio is 130% followed by Spain and France closing at 100%.[xvi] The delay in implementation of financial measures can further push these countries towards severe recession. Already Paris, Rome and Madrid view this crisis as a make-or-break moment for the EU with significant differences between the member states and the EU on how to handle the pandemic, and on whether to issue joint-bonds.
What is at stake is the economic recovery of richest bloc of nations - any failure in the decision-making and implementation of policies would not only affect the economic health of the continent but will also have repercussions at the regional and societal levels. This is precisely why these countries have been pushing for the coronabonds – a move towards the mutualisation of debt in the Eurozone. The opposing countries argue that the stimulus provided by EU and the individual countries’economic packages are of sizable amount.However, it remains to be seen whether they will be enough to help these countries withstand the economic fallouts and achieve stability.
The issuance of coronabonds will raise the borrowing costs for the northern states whose leaders worry a domestic backlash in terms of rising anti-EU sentiments. They have argued that “by treaty, every member nation of the EU is responsible for its own finances.”[xvii] In turn they have agreed that reprimand European countries for running higher deficits. They have also supported the decision by the ECB to introduce new bond-buying program, under which the ECB will buy some debt of the Eurozone members, thereby giving time to the national leaders to formulate next set of strategies. [xviii]
Anti-European sentiments are already on the rise in Italy (third-largest economy of the Eurozone) and Spain (fourth-largest economy)- the hardest hit by the pandemic. There is already a growing outrage in these countries over the way the EU has handled the crisis. Added to this is the feeling that as with other crises (2008 economic and 2015 migration crises), the EU has failed these countries in their hour of need. These feelings aregoing to be further aggravated with these countries moving towards deep recession. As stated earlier, the bloc’s economy is expected to shrink by 10% as compared to 4.5% during the 2008-9 financial crises. As the debates over North-South division continues, the EU policies and strategies towards mitigating economic impact of coronavirus appear to be a patchwork of measures given its limited competences.
*Dr. Ankita Dutta, Research Fellow, Indian Council of World Affairs.
Disclaimer: Views expressed are personal.
[i]CNN, 10 April 2020, https://edition.cnn.com/2020/04/10/europe/eu-bungled-coronavirus-response-analysis-intl/index.html, Accessed on 10 April 2020
[ii] The EU’s response to the COVIS_19 outbreak, European Council, 26 March 2020, https://www.consilium.europa.eu/en/policies/covid-19-coronavirus-outbreak-and-the-eu-s-response/, Accessed on 10 April 2020
[iii]Coordinated economic response to the COVID-19 Outbreak, 13 March 2020, European Commission, https://ec.europa.eu/info/sites/info/files/communication-coordinated-economic-response-covid19-march-2020_en.pdf, Accessed on 10 April 2020
[v] Corona Response, Economy, European Commission, https://ec.europa.eu/info/live-work-travel-eu/health/coronavirus-response/economy_en, Accessed on 10 April 2020
[vi]Politico, 17 March 2020, https://www.politico.eu/article/the-ecb-rises-up-to-expectations-launches-massive-bond-buying-program/, Accessed on 11 April 2020
[vii]NPR, 9 April 2020,https://www.npr.org/sections/coronavirus-live-updates/2020/04/09/831395411/eu-finance-ministers-reach-590-billion-coronavirus-rescue-deal, Accessed on 11 April 2020
[viii]World Economic Forum, 9 April 2020, https://www.weforum.org/agenda/2020/04/european-union-finance-fiscal-money-support-covid-coronavirus/, Accessed on 11 April 2020
[ix]Brussels Times, 5 April 2020https://www.brusselstimes.com/all-news/eu-affairs/104800/spanish-pm-calls-for-marshall-plan-for-post-virus-europe/, Accessed on 17 April 2020
[xi]The New York Times, 8 April 2020, https://www.nytimes.com/2020/04/08/business/europe-economy-france-germany.html?auth=login-email&login=email, Accessed on 11 April 2020
[xiii]CNN, 10 April 2020, https://edition.cnn.com/2020/04/10/europe/eu-bungled-coronavirus-response-analysis-intl/index.html, Accessed on 11 April 2020
[xiv]Spiegel International, 27 March 2020, https://www.spiegel.de/international/europe/calls-for-corona-bonds-met-with-familiar-nein-a-6eb0e5ce-fddd-4909-95bb-ae8421ef3d2e, Accessed on 12 April 2020
[xv]The Guardian, 9 April 2020, https://www.theguardian.com/business/2020/apr/09/eu-risks-break-up-over-coronabonds-row-warns-italian-pm, Accessed on 12 April 2020
[xvi]CNBC, 9 April 2020, https://www.cnbc.com/2020/04/09/coronavirus-eurozone-tries-to-agree-on-new-stimulus-after-failed-talks.html, Accessed on 12 April 2020
[xvii]The New York Times, 9 April 2020, https://www.nytimes.com/2020/04/09/world/europe/coronavirus-european-union-bailout.html, Accessed on 12 April 2020
[xviii]The New York Times,20 March 2020, https://www.nytimes.com/2020/03/20/business/EU-European-Central-Bank-economy-covid.html, Accessed on 12 April 2020