FILE PHOTO: European Union flags fly near the European Commission headquarters in Brussels, Belgium, October 4, 2019. REUTERS/Yves Herman
March 25, 2020
By Jan Strupczewski and Francesco Canepa
BRUSSELS/FRANKFURT (Reuters) – Leaders of nine EU countries urged the bloc on Wednesday to issue a “common debt instrument” to cushion their economies from the shock of the coronavirus crisis, challenging Germany and others adamantly opposed to pooling risk across the continent.
European Union finance ministers broadly agreed the previous day on an idea that governments grappling for funds might apply for a credit line worth some 2% of their GDP from a joint bailout fund called the European Stabilisation Mechanism (ESM).
But there was no agreement on joint debt issuance across the 19 member states that share the euro single currency – long a goal for the “Club Med” group of mostly southern member states, most prominently Italy, and just as much a red line for a group of wealthier northern countries known as the “Frugals”.
That left it to the leaders, who will meet in a videoconference summit on Thursday, to thrash out the issue.
Germany was one of the founders of the euro zone, in which the European Central Bank sets monetary policy for all the 19 countries that share the EU’s single currency, the euro.
But the ECB, to its regret, has no power over budgets.
ECB chief Christine Lagarde asked the ministers at their meeting on Tuesday to give serious consideration to a joint issue of “corona bonds” as a one-off, four officials said.
One official said her proposal had run into opposition from Germany, the Netherlands and other northern European countries, “but also a lot of support beyond Club Med”. Germany and others could block the proposal at Thursday’s meeting.
Sources said the German position, as it was in the 2010-2012 euro zone sovereign debt crisis, is that taking part in a mutual bond issue or “corona bond” is still a step too far, and would be resisted by its parliament and constitutional court.
There is also public opposition to putting German taxpayers’ money on the line to help countries seen as more spendthrift than Germany, which, alone among euro zone members, runs a balanced budget.
The push-back from northern countries – which sources said included the Netherlands, Finland and Austria – in the face of Europe’s most serious crisis since World War Two highlights a lack of solidarity that has been undermining the EU’s principle of shared values ever since the debt crisis and the migrant crisis of 2015.
Some member states were initially reluctant to share medical equipment with Italy, which has suffered the deadliest outbreak, and several countries have reintroduced border controls – recalling the migrant crisis – inside what is normally the open-frontier Schengen Zone.
“FACING THE SHOCK TOGETHER”
In a joint letter ahead of Thursday’s virtual summit, nine countries, led by economic heavyweights France, Italy and Spain, called for a “common debt instrument issued by a European institution to raise funds on the market”.
“By giving a clear message that we are facing this unique shock all together, we would strengthen the EU and the Economic and Monetary Union and … provide the strongest message to our citizens about European determined cooperation and resolve to provide an effective and united response,” they said.
The letter was also signed by the leaders of Portugal, Ireland, Luxembourg, Slovenia, Belgium and Greece.
Officials say the need for a decision on a bailout plan has been reduced by the ECB’s announcement of a coronavirus emergency bond-buying program worth 750 billion euros.
Still, the ECB has long sought a euro zone-wide safe asset, arguing that a “Euro Bond” would be key to crisis-proofing a currency bloc that came close to collapse in the debt crisis only a few years ago.
A German government spokesman, responding to the letter, said it was normal for leaders to put forward proposals ahead of EU summits, but in the end the matter would be decided by all member states. No comment was immediately available from the Netherlands or Austria.
Such an instrument would give Brussels a fiscal lever that could be moved quickly and in tandem with the ECB, which has for years complained that budget policy is out of sync with monetary policy, hindering its economic stimulus efforts.
It would also let commercial banks cut holdings of their home country’s debt, breaking the so-called “doom loop” between banks and their host country in which any regional debt crisis can quickly morph into a banking crisis as well.
(Additional reporting by Balazs Koranyi in Frankfurt, Andrey Khalip in Madrid, Gabriela Baczynska in Brussels and Andreas Rinke in Berlin; Writing by John Chalmers; Editing by Kevin Liffey)