EU deadlocked after 4pm meeting on economic aid

European economies are now facing the deepest recession since World War II, and ministers had hoped to agree on a € 500 billion program to cushion the economic shock.

Southern states, led by Italy, which has been hardest hit by the pandemic so far, have argued for sharing the costs of the recovery and easing austerity conditions on lending.

The countries of the North, fiscally conservative, led by the Netherlands but supported by Germany and Austria, had been reluctant.

They fear that burden sharing and weakening conditions will lead to less disciplined economic policy for heavily indebted southern EU countries.

This same dynamic ten years ago has made managing the debt crisis painfully difficult, bringing the eurozone to the brink of collapse.

Ministers will meet again on Thursday, but positions are unlikely to change significantly.

The dispute between the Netherlands and Italy over the conditions attached to the potential use of part of the EU’s rescue fund, the European Stability Mechanism (ESM), could not be resolved.

The ESM was to offer lines of credit representing up to 2% of the production of EU members, or 240 billion euros in total.

Normally, ESM loans come with strict austerity conditions. Italy wants to see them redesigned for the corona crisis.

“Due to the current crisis, we have to make an exception and the MES can be used unconditionally to cover medical costs,” Dutch Finance Minister Wopke Hoekstra tweeted after the meeting.

“For long-term economic support, we believe it makes sense to combine the use of MES with certain economic conditions,” he added, however.

Disagreements on the exact wording of the future stimulus package and on a possible future common debt mechanism to support it have also hampered any deal.

The French government presented a plan that would create a temporary reserve worth 3% of the EU’s GDP for 10 years and be financed by the joint issuance of debt.

The French plan looks like the so-called “coronabonds”, supported by Italy and Spain, to jointly finance the economic fallout from the crisis.

“The Netherlands was and remains against the idea of ​​Eurobonds, we believe this will create more problems than solutions for the EU,” Hoekstra said, referring to such a common debt.

“We would be forced to guarantee the debts of other countries, which is not reasonable. The majority of the Eurogroup shares this point of view and does not support Eurobonds,” he added.

Another measure discussed by ministers was the creation of a guarantee fund, managed by the European Investment Bank (EIB), mobilizing 200 billion euros for companies.

The European Commission has also proposed to raise 100 billion euros for an unemployment scheme.

Meanwhile, the commission also suspended state aid limits and allowed countries to increase their debt and spend more on the economy.

“Like a team”

The ministers had been tasked with making proposals on how to offset the economic impact of the pandemic, without giving political guidance on the issue.

French and German ministers Bruno Le Maire and Olaf Scholz called on all EU members “to meet the exceptional challenges to reach an ambitious agreement” in a statement Wednesday.

Italian Prime Minister Giuseppe Conte on Wednesday urged the EU to “think like a team”.

The ball could be returned to European leaders to unblock disagreements on the conditionality of the ESM and the future recovery plan.

In the background, political populists are pressuring governments to harden their positions.

In Italy, far-right opposition leader Matteo Salvini targeted the MES, tweeting that he didn’t trust EU loans and didn’t want Italy to ask for more money in Berlin or Brussels.

Italy wants to make the debate a matter of EU solidarity and does not want to be seen as giving in to the difficult conditions demanded by Germany and the Netherlands.