EU Grapples With How to Support Member States’ Economies

There is broad support for allowing countries to tap precautionary credit lines from the eurozone’s bailout fund, European officials said on Tuesday, with governments considering allowing countries to borrow as much as 2% of their annual economic output.

Following a teleconference of European Union finance ministers, officials said there was no final decision, however, and EU leaders were set to discuss the issue when they speak on Thursday. The bloc is looking at measures to step up its fiscal response to the coronavirus crisis.

There has been debate in recent weeks about whether to allow countries to access the European Stability Mechanism, which was one of the region’s strongest responses to the financial crisis, aimed at assuring markets that eurozone governments had the means to rescue struggling economies. The fund currently has EUR410 billion ($440 billion) in loans available.

However, proposals by some European government for the issuance of common eurozone debt to confront the economic impact of the coronavirus crisis appeared to have made little headway for now, officials said.

“There is broad support to consider a pandemic crisis-support safeguard based on an existing ESM precautionary instrument, such as the Enhanced Conditions Credit Line (ECCL),” Eurogroup President Mario Centeno said after the discussions. “This would provide an additional line of defense for the euro and work as insurance to protect us against this unfolding crisis.”

Under current rules, the ECCL credit line has relatively loose rules attached, although any country using it would see increased surveillance. The country would also be expected to have restored economic and financial stability within two years, the maximum period of the credit line, which could go undrawn. The guidelines for how the credit line is used and policed could be adapted by ministers, if there was a consensus.

Klaus Regling, managing director of the ESM, told reporters that if a country draws money down from the credit line, it could be spent to boost health spending to respond to the crisis or to increase the fiscal stimulus measures intended to cushion its economic blow.

The 2% of GDP figure was a “substantial amount of money,” he said. “The consensus was growing that this would be the right contribution coming from the ESM.”

But activating the ESM for the coronavirus still needs to overcome some hurdles among member states. German and Dutch officials have sounded cautious as the bloc has divided along similar lines seen in the response to the financial crisis a decade ago. A country would need backing of all eurozone countries if it sought to apply for a credit line.

After Tuesday evening’s discussion, Dutch Finance Minister Wopke Hoekstra told reporters his government would prefer leaving the ESM’s assets untouched for now in case the crisis worsens in coming months, leaving cash-strapped governments few sources of funding. He noted that eurozone countries aren’t currently struggling to raise financing in the market.

“The reality now is we’re driving through the mist,” he said, referring to the virus’s impact on economic and financial conditions. “[The ESM] is the lender of last resort. It is good that it is part of our toolbox. But it is also money that you can only spend once.”
Source: Dow Jones