Grants versus loans

The euro survived the debt crisis between 2010 and 2012, saved by massive EU bailout loans to countries such as Greece, Portugal and Ireland, and pledges by the European Central Bank to do “anything” to defend the currency.

As EU leaders struggle to provide more aid money, the big question is whether pandemic recovery funds should offer loans or grants to member countries. Using grants will require net contributors to the EU budget, including “Frugal Four,” to pay more. Relying on loans, meanwhile, will mean burdening heavily indebted countries like Italy with more obligations.

The Pitch marked a major change in Berlin’s position, underlining the severity of the crisis and changing the tenor of the discussion, according to Jacob Funk Kirkegaard, senior colleague at the Peterson Institute for International Economics.

“This is Germany realizing that Italy is not Greece,” Kirkegaard said, referring to the importance of avoiding the debt crisis in the bloc’s third largest economy. “If we have another asymmetrical recovery, then that will be very bad for the European Union and very bad for the German economy itself.”

Trade within the European Union accounts for nearly 60% of German exports.

The proposal still needs to be formalized by the European Commission, and not all 27 member countries. Austria, the Netherlands, Sweden and Denmark seem united against the Franco-German plan.

But without Germany, their opposition seems thin, said Mujtaba Rahman, managing director for Europe at the Eurasia consultancy group.

“There is a big movement in most European capitals in recognition of the scale of the challenge,” Rahman said. “Obviously that’s what you don’t get from ‘Frugal Four.’ This effectively restated the old position. “

‘Very difficult negotiations’

Negotiations will begin in earnest after the European Commission reveals its framework this week.

Rahman expects the Commission to call for recovery funds worth € 600 billion ($ 654 billion) to € 700 billion ($ 763 billion), although the amount of key information can be reduced during talks. He thinks the proposal will include a mix of cheap loans and direct grants to try to bring more conservative Northern countries.

However, this is not the only problem that needs to be hammered with a budget of around € 1 trillion ($ 1.1 trillion).

Determining the European Union budget, which runs from 2021 to 2027, has been compounded by the fact that Brexit has blown up huge holes in financial block over the next seven years, said Guntram Wolff, director of Bruegel, a think tank based in Brussels. . Britain has become the second largest contributor to the European Union.

Member countries also need to understand how much money they will put in, whether rich countries will still get discounts, and importantly, the types of programs that the bloc will support. The pandemic complicates this issue, which has been debated.

The timeline is tight. Getting aid to Europe in the second half of this year will require agreement between EU leaders in June or July, according to Rahman, followed by a strengthening vote in the European Parliament in early September. The lack of a busy summer tourism season is expected to hit Spain, Italy, Portugal and Greece hard in the coming months.

Centeno, who also serves as Portugal’s finance minister, highlighted the urgency over the weekend.

“It would be better if we found an agreement on the main features of the Recovery Fund before the summer, to provide guarantees to our citizens, companies and markets, and increase the credibility of the EU response,” he tweeted. “That will be a very difficult negotiation.”

Political storm brewing

In recent days, political leaders have not shied away from overcoming the potential consequences of failure.

“We must show that what is not at stake is a national contribution from one or the other for the European budget,” said French Secretary of State for European Affairs Amélie de Montchalin in an interview Monday with Le Point magazine. “This is the vitality of an economic project that makes us prosperous.”

Many Italians feel that they are left alone to face the consequences of the pandemic, reinforcing the hatred that has accumulated after the 2015-16 migrant crisis, Enrico Letta, the former prime minister of Italy, said Friday.

“This is why, I think, it is very important to have a very comprehensive, fast and effective European response,” he told CNN Business, Richard Quest.

If Italy and other southern countries experience a slower recovery than their northern neighbors, it will feed euroskeptic powers and political instability in the region, Kirkegaard said.

In Germany, troubled companies have received substantial credit guarantees from the state, which means more will survive. In Italy, however, the risk of corporate defaults is increasing – underscoring the need for a more coordinated strategy.

“Unless you get a level playing field here, that will be a real problem,” Kirkegaard said.

And while Germany has come to provide grants, the country has not agreed to include capital guarantees needed to get aid funds before 2021, Rahman said. Such delays can be destructive.

The question of time, he said, was “the single biggest risk.”

– Pierre-Eliott Buet contributed reporting.