The EU is still divided on coronavirus relief. This could tear it apart

france tourism coronavirus covid 19 pandemic paris vanier pkg intl ldn vpx_00021415

On Wednesday, President of the European Commission Ursula von der Leyen is expected to unveil her proposal to dig Europe out of a historical recession along with plans for a long-term EU budget. However, there is still a need to bridge deep divisions between Member States, increasing the risk that aid may be urgently withheld.

The rift complicates efforts to quickly get money in the countries most affected by the pandemic, such as Spain and Italy, where anti-EU sentiment is on the rise. Leaders warn that the future of the European Union may depend on what will happen next.

An irregular recovery “will tear our single market to pieces and set the stage for major political and financial tensions in the euro area and in the European Union,” said Mário Centeno, president of the body of finance ministers of Europe recently , in an interview with the Greek newspaper Politis. “We will sleep in a financial crisis. There is a lot at stake.”

Grants against loans

The euro managed to survive the debt crisis between 2010 and 2012, spared by huge EU bailout loans to countries like Greece, Portugal and Ireland, and the promise of the European Central Bank to do “everything we need” to defend the currency.

Now, Europe as a whole has been battling its worst economic shock since the 1930s, only some countries will suffer much more pain than others. The European Commission expects GDP in the 19 countries that use the euro to do so 7.75% contract this year, a record. The Italian economy could shrink by more than 9%, making it even more difficult to serve its mountain of $ 2.4 trillion ($ 2.6 trillion) of debt. The country’s debt-to-GDP ratio was already 135% at the end of 2019.

While EU leaders are rushing to make more aid funds available, the big question is whether the pandemic fund should offer loans or grants to member states. Using grants would require net contributions to the EU budget, including the “Four Frugal”, to pay more. In the meantime, relying on loans would mean saddling highly indebted countries like Italy with even more liabilities.

A turning point came last week when Germany and France proposed creation a recovery fund worth € 500 billion ($ 549 billion). Under the proposal, the European Commission would borrow money to stimulate the economy and channel subsidies to the most affected regions and sectors through the EU budget. The debt issued to raise the fund should be repaid over time, “but not by the beneficiaries,” said French President Emmanuel Macron.

The tone marked a major change in Berlin’s position, emphasizing the gravity of the crisis and changing the tenor of the discussions, according to Jacob Funk Kirkegaard, senior member of the Peterson Institute for International Economics.

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“This is Germany who realizes that Italy is not Greece,” Kirkegaard said, referring to the importance of avoiding a debt crisis in the bloc’s third largest economy. “If we have another asymmetric recovery, then it will be very negative for the EU and extremely negative for the German economy itself.”

Trade within the European Union represents almost 60% of German exports.

The proposal has yet to be formalized by the European Commission and not all 27 Member States are still on board. Austria, the Netherlands, Sweden and Denmark appear united against the Franco-German plan.

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

“There has been a great movement in most of the capitals of Europe in recognition of the scale of the challenge,” said Rahman. “This is definitely what you don’t get from the Frugal Four. It’s actually a reinterpretation of old positions.”

A “very difficult negotiation”

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

Rahman expects the Commission to request a recovery fund worth 600 billion euros (654 billion dollars) to 700 billion dollars (763 billion dollars), although the main number could be reduced during the talks. He thinks the proposal will include a mix of low-cost loans and direct grants to try to engage the more conservative Northern states.

This isn’t the only problem that needs to be solved for a budget of around € 1 trillion ($ 1.1 trillion), however.

Determining the EU budget, which runs from 2021 to 2027, has been made more difficult by the fact that Brexit has made a huge hole in the block’s finances over the next seven years, said Guntram Wolff, director of Bruegel, a think tank based in Brussels. The United Kingdom was the second largest contributor to the European Union.

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Member States will also have to deal with the amount of money they have to invest, if the richer countries still receive discounts and, above all, the types of programs that the bloc funds will support. The pandemic complicates these problems, which were already controversial.

The timeline is tight. Getting relief funds in Europe in the second half of the year will require an agreement between EU leaders in June or July, according to Rahman, followed by an affirmative vote in the European Parliament in early September. The lack of an intense summer tourist season is expected to hit Spain, Italy, Portugal and Greece hard in the coming months.

Centeno, who is also Portugal’s finance minister, stressed the urgency over the weekend.

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

Political storm

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

“We have to show that what is at stake is not the national contribution of either of them to the European budget,” said French Secretary of State for European Affairs Amélie de Montchalin in an interview Monday with Le Point magazine . “It is the vitality of the economic project that has made us prosperous”.

Many Italians believe that they have been left alone to deal with the consequences of the pandemic, amplifying the resentment accumulated following the 2015-16 migration crisis, said former Italian Prime Minister Lotto on Friday.

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“This is why, I believe, it is really necessary to have a very complete, rapid and effective European response,” he told CNN Business Richard Quest.

People walk through a commercial colonnade in Milan on May 18.

If Italy and the other southern countries were to experience a slower recovery than their northern neighbors, it would fuel Eurosceptic forces and political instability in the region, Kirkegaard said.

In Germany, firms in difficulty have received considerable credit guarantees from the state, which means they will survive longer. In Italy, however, the risk of corporate defaults is growing, emphasizing the need for a more coordinated strategy.

“Unless you have some level of equality here, this will be a real problem,” said Kirkegaard.

And while Germany has provided grants, it has not agreed to prepay the capital guarantees needed to procure relief funds before 2021, Rahman noted. Such a delay could be harmful.

The timing issue, he said, is “the single biggest risk.”

– Pierre-Eliott Buet contributed to the report.

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