(Bloomberg) -- European Union governments are trying to forge a consensus over how to provide aid to the countries hardest hit by the coronavirus pandemic.
With France and, crucially, Germany proposing a jointly-financed recovery fund to help the region cushion the blow from the steepest recession in living memory, the outcome of the talks could determine the bloc’s future direction and have global ramifications.
Negotiations will formally begin this week, when the EU’s executive arm is due to unveil its own proposal that will form the basis for discussions, though dividing lines have already been drawn. France and Germany want the fund to make grants to countries and sectors most in need, while a group of rich member states, including Austria and the Netherlands, say they will only agree to concessional loans for those that need it.
Here’s a comparison of the two plans:
France and Germany proposed a 500 billion-euro ($544 billion) recovery fund. That would come on top of the regular EU budget of 1 trillion euros for the next seven years and some 2 trillion euros that individual member states have already extended in state aid, an unprecedented wave of fiscal expansion. It would also add to 240 billion euros in credit lines made available by the euro area’s bailout fund, a 100 billion-euro employment insurance fund, and a specialized European Investment Bank fund, which aims to mobilize 200 billion euros in financing.
The rival group, encompassing Austria, the Netherlands, Sweden and Denmark, doesn’t specify the size of the recovery fund, suggesting that the bloc needs to make an assessment of its funding needs first. The fact they haven’t put forward a number suggests that there’s room for compromise here.
France and Germany want the commission to issue bonds. Their opponents accept that a jointly-financed fund on top of the regular EU budget is needed. They don’t specify how it will be paid for, but the only way to create such a fund would be via debt issuance or direct contributions, and debt looks far more palatable.
The four hardliners’ main red line is debt mutualization -- which would mean the rich countries being on the hook for the liabilities of the rest. The Franco-German proposal stops short of full debt mutualization, so there’s common ground here too.
Paris and Berlin want the 500 billion euros to be repaid from the EU budget, where richer countries contribute the most. Each EU member would be liable for repayments equivalent to its contribution to the budget rather than the entire amount.
Grants vs Loans
The most contentious point is whether money from the recovery fund will be distributed in the form of loans to be repaid by the beneficiaries, or grants, which will be covered by the joint EU budget.
Austria and its allies want a model similar to the one used during the sovereign debt crisis: European institutions use their stellar credit rating (thanks to the backing of the richer members) to raise money on capital markets and use that money to offer low-interest loans to weaker states. That’s European solidarity in practice, they say.
Their opponents including France and Italy say such loans will add to the debt burden of struggling countries, testing investor confidence and weighing on their future growth prospects with the danger that the two halves of the EU drift further and further apart in economic terms. The Franco-German plan to issue grants instead would mean no additional debt load and so greater support for the weaker nations.
In its proposal on Wednesday, the European Commission will seek to bridge the two views, proposing a combination of loans and grants to be distributed from the recovery instrument, one European official said. Given that loans are already available from the euro area’s bailout fund and through the agreed employment insurance scheme, the commission proposal will be grants-heavy, setting the stage for what could prove an acrimonious negotiation with frugal governments.
Austrian Chancellor Sebastian Kurz told German and Austrian radio stations on Saturday that he’s ready to accept some of the aid to be disbursed as direct handouts, a position previously rejected by all four nations.
Austria and its allies want it to be clear from the outset that the recovery fund will only run for two years. They are worried about establishing a precedent for more fiscal integration in the future.
Again, there should be common ground here. Germany and France have said there should be a “clearly-specified” expiry date for the fund, while the countries in need of aid will want the funds to be paid out as quickly as possible, rather than spaced out over time.
Both the Franco-German proposal and the alternative paper say that proceeds from the recovery fund won’t be a blank check. The specific strings attached, however, are likely to be a contentious topic as the negotiations advance.
Both proposals foresee that the money will be used to finance the EU’s policy priorities, such as the transition to climate neutrality and digital transformation. They also say that disbursements should be tied to “sound economic policies,” meaning that beneficiaries will be asked to put their finances in order after the crisis is over. Such belt-tightening conditions may not be palatable to Italy.
More problematically though, the Franco-German proposal also advocates a tax on tech companies, which some in the Austrian camp oppose, and the abolishment of preferential tax regimes. That won’t go down well in countries such as Ireland, the Netherlands and Luxembourg that have made low corporate taxes a central pillar of their economic strategy.
On the other side, Austria and its allies want to tie disbursements to respect for the rule of law, which the governments of Poland and Hungary have been accused of undermining. Given that any decision on the recovery fund would require unanimity among all 27 governments, that’s also going to cause trouble.
The commission will unveil its own proposal on Wednesday, kicking off negotiations between national governments until unanimity is reached over a summit of the bloc’s leaders. The decision on the recovery fund is part of the negotiations for the 2021-2027 EU budget, a multi-layered process out of which each country wants to extract different concessions, so don’t expect an immediate result.
In the meantime, Europe will rely on asset purchases from the European Central Bank to keep borrowing costs low and on national spending measures to keep its businesses afloat during the worst recession since World War II.
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