The news is full of speculation over the approach the European Union will take to safeguard the survival of its economy and the individual economies of its member states. Last week, EU finance ministers approved a €540 billion package of measures that are meant to support the flagging economies of the EU and provide some much-needed liquidity. This package includes €240 billion in credit lines from the ESM, European Stability Mechanism, an issue that has proved controversial in Italy.
The ESM was established in July 2012, just after the treaty of Lisbon. It is available for all member states of the European Union and is meant to help sustain countries who have found themselves in difficult circumstances. Thus far, it has been utilised for 5 countries: Ireland, Cyprus, Spain, Portugal and Greece. The mechanism funds itself via issuing bonds, guaranteed by all member states. Currently, the Forward Commitment capacity of the ESM, its remaining lending capacity, is around 410 billion euros.
The financial aid package has only come as a result of consistent pressure from southern European Union countries. In addition to the 6 traditional credit line obligations the aid-seeking countries have to perform (the troika -European Commission, ECB and IMF – intervene directly on such countries’ economies), a new one has been created, known as “Pandemic Credit Line”. It has no limitations, apart from the only requirement of the funds being used for healthcare expense. Members states requesting this new support measure are expected to get 2 per cent of their GDP.
A debate is currently raging in Italy, causing divisions within the government. In a strange twist, the conservative opposition, represented by the conservative parties (Matteo Salvini and Giorgia Meloni in particular) is fiercely against the ESM, while the ruling parties are not uniform in their ideas (as usually happens in this government, by the way). In fact, in the “yellow-and-red majority”, the “Democratic Party”, with the current Minister of Economy Roberto Gualtieri as its spokesman, is in favour with the “5 Stars Movement” opposing it.
The conservative parties claim the ESM to be of little use, both in terms of economic resources (Italy would get 36 billion euros, which is not likely to be enough) and would have consequences for stability of the country as a whole, due to heavy interventions by the troika, and Italy has already had enough of that (for instance, it almost had to go through the infringement procedure recently). Therefore, Prime Minister Giuseppe Conte finds himself in a very confusing situation, to the point that he even personally attacked Salvini and Meloni in one of his last televised speeches – something that is unacceptable in civilised debate.
Issuing “Eurobonds” is another way of guaranteeing liquidity for member states. The idea is like the ESM and has been known to the European community for long time. The first formal suggestion of Eurobonds is attributed to Juan Manuel Barroso in 2011, who was president of the European Commission at that time. More specifically, the term “Eurobonds” refers to obligations which are guaranteed by all member states and are issued by the ECB. The real benefit is the generally low interest rate compared to many government bonds in the Union (as they are issued by one entity, addressed to one “big country”- the European Community – and use a single currency, the euro). France, Italy, Spain and Portugal are among the countries pushing for Eurobonds as the initiative would benefit them more due to their comparatively high public debts.
More financially stable countries (typically in the North), such as Germany, Austria, Holland and Finland, oppose the introduction of Eurobonds; partly because they do not want to lose the competitive advantage of having more appealing government bonds for investors and banks. Even in the unlikely scenario of Eurobonds being approved, a more centralised management of the countries’ economies in the hands of the European Union would be requested, with the possibility of harming the most “fragile” member states. With such uncertain scenarios in front of them, are the most stable (and leading) European countries willing to step back for the common good? Should the financially weakest countries have to rely solely on their economies and not be supported by their fiscal union partners? Are solidarity and collaboration not two of the foundational principles of the European Union?
More broadly, will the economic package be enough to save the Eurozone? Even the director-general of the ESM, Klaus Regling, thinks that the EU will need a second phase of financial support; which could be at least another $500 billion. Can the EU come together, or will coronavirus break it apart?