These Are the Options for Europe’s Giant Virus Rescue Package

(Bloomberg) -- European Union finance ministers are on a deadline.

The bloc’s leaders have asked them to come up with a set of proposals to help mitigate the economic impact of the coronavirus by the end of this week and the ministers are aiming to reach a consensus during a video conference Tuesday.

They are likely to agree on a toolbox of measures worth over half a trillion euros that leaders could potentially sign off on later in the week. National fiscal measures have already reached 3% of EU GDP as well as liquidity guarantees worth 18% of the bloc’s output. The European Central Bank has also launched unprecedented bond purchases in what could end up becoming the biggest economic rescue package the continent has seen in peacetime.

These Are the Options for Europe’s Giant Virus Rescue Package

Here what’s on the table and how likely it is it will be agreed.

The Bailout Fund

At their last meeting on March 24, the finance chiefs reached a “broad consensus” on using the euro-area bailout fund to offer credit lines worth up to 2% of output to all the bloc’s members and even to go beyond that amount in exceptional circumstances.

The existence of such facilities should bring down borrowing costs for euro-area sovereigns and if the loans were needed they would be available very quickly. Tapping in to the ESM’s 410 billion-euro ($440 billion) war chest could also pave the way for the ECB to buy vast amounts of sovereign bonds through its Outright Monetary Transactions program.

The sticking point has been the conditions tacked on to these credit lines but now they are approaching a deal which would see the minimum of strings attached -- countries will just have to show that the money would be used to address the impact of the virus. While most countries are on the same page, some like Austria and the Netherlands have argued that in the medium term, some conditions on the country’s fiscal health should be included.

Spain and Italy have called for all countries to apply for a credit line, to reduce the supposed stigma of seeking financial help. But the most likely outcome is that only those in need will do so.

The Public Investment Bank

Among the least controversial proposals floated is the creation of the pan-European Guarantee Fund to be managed by the European Investment Bank. The fund will aim to ensure that healthy companies of all sizes will have the liquidity they need to weather the rapidly unfolding crisis, according to documents circulated among EU diplomats and seen by Bloomberg.

The fund will have 25 billion euros raised proportionally by EU member states, so the biggest economies like Germany will chip in more. According to a French memo circulated to EU diplomats, such a fund can mobilize in excess of 200 billion euros. France also wants member states to finance a capital increase for the EIB -- already the world’s biggest multilateral financial institution.

The use of the EIB has broad support among governments and is expected to be backed by ministers, though the final amounts are still to be determined.

The Unemployment Program

The European Commission has proposed a program with up to 100 billion euros to loan to countries facing rising joblessness because of the lockdown. According to the plan, known as SURE, EU governments will be able to request financial assistance if “public expenditure has suddenly and severely increased as of Feb. 1 2020 due to the adoption of national measures directly related to short-time working schemes” because of the coronavirus outbreak.

The plan would see the EU raise money on international markets backed by guarantees from member states.

While ministers are expected to debate this, it is widely expected to get their backing.

The Bailout Fund, Again

EU officials are also looking at a supplementary lending program financed by the bailout fund.

The facility would fund emergency expenditures for natural disasters including pandemics and could be used in parallel with the credit lines, according to the draft plans discussed among EU diplomats last week. The loans would be available for a period of 12 months, though it could only be used to finance the emergency response.

The total available would be 80 billion euros and the loans would be for up to five years, compared with up to 10 years for the credit lines. With consensus growing behind the credit lines, it’s unlikely this instrument will end up as part of the toolkit.

Joint Bonds

Eleven euro-area countries have been pushing for joint debt issuance to fund the rebuilding effort. Such an instrument would ease pressure on highly indebted countries like Italy and, to a lesser extent, Spain and France and would reduce the risk of a backlash from bond investors.

Countries like Germany and the Netherlands have long opposed the idea of joint issuance. They argue that it wouldn’t solve the issue at hand and are wary that they could end up on the hook for spending in the poorer south.

While politically divisive, these pooled debt securities could help overcome one of the biggest hurdles facing the EU: how to drive more financial integration and risk-sharing across the continent. ESM chief Klaus Regling has warned that setting up a new institution to issue joint debt could take up to three years, so it would be better to use an existing institution such as the European Commission, the European Investment Bank or the bailout fund itself.

These Are the Options for Europe’s Giant Virus Rescue Package

It’s highly unlikely finance ministers will reach an agreement on backing such an instrument at this point. The debate is whether their statement will hint at that possibility in the future. Just that language has been a dealbreaker for some countries so far, others have refused to move forward unless the option of coronabonds is at least up for discussion.

The French Plan

In an effort to bridge the gap, France is proposing a temporary economic recovery fund. The French have promised they aren’t talking about coronabonds, but the proposal would involve “the joint issuance of debt instruments to mutualize the cost of the crisis.”

The fund would exist for five to 10 years, run by the European Commission and would finance programs designed to kick-start the economy. According to the proposal seen by Bloomberg, such debt could be paid back through a special solidarity tax or from the EU budget.

The plan is thin on detail -- like how much money would be involved and who would get it -- because the French see it as a trial balloon are are trying to avoid it be rejected from the off.

The Dutch Plan

After coming in for criticism for a lack of solidarity toward the hardest hit countries, the Dutch have come up with something of an olive branch: a 20 billion-euro emergency fund.

According to another memo seen by Bloomberg, the fund would only be used for emergency aid to cope with the pandemic rather than other any broader economic measures and would be financed by bilateral contributions by member states.

While the plan would involve direct donations rather than loans, it’s tiny compared to what’s required to rebuild the European economy so it’s highly unlikely on its own to satisfy calls from the South for solidarity.

The EU Budget Plan

The EU’s longterm budget will be part of the bloc’s economic response to the outbreak.

The budget is the main tool of direct fiscal transfers from richer to poorer member states. But with a ceiling around 1% of EU GDP for its seven-year period, and most of its funds channeled to farmers and infrastructure projects, it doesn’t have the firepower to fight a recession, much less one as bad as the EU is facing now

The current budget ends this year, and the remaining funds that could be deployed or used as guarantees to issue fresh debt are limited, officials say. But the next seven-year plan, which needs to be agreed in the coming months, will focus largely on helping the bloc recover from this crisis.

European Council President Charles Michel has floated the idea of a special, expanded budget for the next one or two years, according to several diplomats briefed on the plans. The idea is to boost the EU’s spending power, but to limit the time to make it more palatable to northern countries.

There’s unlikely to be much discussion of the budget this week, but it could feature in a broader toolkit of options that finance chiefs will offer to their leaders.

©2020 Bloomberg L.P.

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