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In the face of skepticism and even derision, the Eurogroup and the European Union's beleaguered 27 EU finance ministers agreed on April 9 to a package of mutually financed emergency rescue measures, signaling European economic solidarity over the COVID-19 pandemic. The agreement includes several important precedent setting decisions and should help facilitate a more ambitious joint economic recovery plan by the EU Council of national leaders later in April.
The ministers' action was not without drama, including a video conference over several days, broken up by angry episodes for everyone to posture to domestic audiences. In the end, they agreed to a package that contains four main components.
First, the European Investment Bank (EIB) gets an additional €25 billion to establish a pan-European guarantee fund, aimed at using leverage to support €200 billion of financing for EU companies, particularly small and medium enterprises (SMEs). The use of leverage from the EIB demonstrates that EU institutions can mobilize limited new public resources to significant effect.
Second, the package calls upon the European Stability Mechanism (ESM)1 to make up to 2 percent of a member state's GDP (in total up to roughly €240 billion) available in pandemic crisis support. This action would be based on its Enhanced Conditions Credit Line (ECCL) framework adjusted to current circumstances. Unlike standard ESM programs, the new credit line would not attach country-specific reform conditionality to this support, for which all euro area countries would be eligible. A country must, however, commit to using these resources to finance direct and indirect healthcare, cure, and prevention related costs from the pandemic.
The absence of traditional conditionality sets an important precedent. This joint money is not fungible but earmarked toward the joint purpose of dealing with the pandemic. This fiscal action mimics aspects of the European Central Bank's earlier Pandemic Emergency Purchase Program (PEPP) that will purchase up to €750 billion of sovereign debt (and other assets) that member states issued during the pandemic in 2020, also without conditions attached.
The political stigma attached to applying for ESM resources will, in light of the available ECB PEPP support, likely mean that no euro area government will rely on the ESM during this crisis, and that the new ESM support program will therefore remain latent.2 The fact that no one will use this program does not, however, diminish the precedent set that joint euro area ESM resources can be released to help address challenges experienced in common. This precedent opens up the possibility that political decisions, not just the next pandemic, will lead to the creation of future joint euro area financial support and instruments.
The ESM's readiness to disburse resources without country-specific conditionality, combined with the suspension of the EU's fiscal rules in the Stability and Growth Pact (SGP) during the pandemic, will be very difficult to reverse. It will not be feasible to reintroduce country-specific conditionality if, for instance, a euro area member state were to apply for a combined ESM/ECB outright monetary transactions (OMT) program. Such a program would normally be dependent on a debt sustainability analysis (DSA),3 but taking pandemic related fiscal developments incurred during the SGP suspension into account in one would amount to retroactive legislation. This is not something legally or politically sustainable in the euro area.
Third, the package tasks the European Commission with establishing a temporary loan-based instrument for financial assistance under Article 122 of the EU Treaty (covering solidarity between member states in times of exceptional events beyond their control—like a pandemic). This temporary instrument of up to €100 billion would support unemployment and wage subsidy schemes in the specific pandemic emergency circumstances. The precedent set here for the European Commission is similar to that set by the ESM actions. The Commission will, based on the common EU budget, raise up to €100 billion in joint resources devoted to the jointly recognized pandemic problem.
Finally, in their April meeting, the EU finance ministers agreed to work on a recovery fund that would be "temporary, targeted and commensurate with the extraordinary costs of the current crisis." This is EU official speak for another jointly financed initiative to support economic recovery after the pandemic. These discussions are now under way, and the wording of the ministers' press release implies that the European Commission and its multiyear budget will play a key role, again entailing nonconditional access and expressing "European solidarity" during this pandemic. How far this cooperation will go remains an open question. But the phrase "commensurate with the extraordinary costs of the current crisis" gives hope that EU leaders are intent on creating a fund of potentially real macroeconomic significance for the EU's economic recovery. Certainly, the available leverage inside the European Commission and its multiyear budget should pool enough for a very large initiative.
These steps, along with the French proposal of a coronavirus recovery fund, raise hopes that European COVID-19 Investment Recovery Bonds (ECIRBs) may soon materialize, overcoming the crisis and—as EU framer Jean Monnet envisioned—ensuring the tragedy of COVID-19 can eventually help build a more united Europe.
Notes
1. The European Commission's Balance-of-Payments facility is available to replicate the ESM's actions for EU members not in the euro area.
2. In that way, it resembles the as yet untested ECB Outright Monetary Transactions (OMT) program, created on paper in 2012.
3. In principle the ECCL framework also requires a beneficiary country to have "sustainable debt," as well as submitting itself to "enhanced surveillance" and review missions. These requirements however can be amended by the ESM Board of Directors.
