What Happened
The European Union is slowly making progress in its efforts to pump money into the Continent's pandemic-riddled economy. But political infighting within the bloc will nonetheless remain a challenge in mitigating the expected dire financial fallout from the COVID-19 crisis in the coming weeks and months.
As part of a new package of fiscal stimulus measures announced on April 9, the finance ministers of the eurozone have pledged to use the bloc's permanent bailout fund to grant loans to countries in distress. EU governments will be able to obtain loans representing up to 2 percent of their GDP from the European Stability Mechanism (ESM), which will come with no strings attached as long as the money is used to support their healthcare systems. The ministers also supported the European Investment Bank's plan to offer 200 billion euros ($218 billion) in loans to small- and medium-sized enterprises in the bloc, as well as proposals that will take longer to materialize as well (including the creation of a fund to assist countries that face sudden increases in public expenditure to preserve employment). In addition, they called for national governments to focus on economic recovery measures during negotiations over the bloc's next seven-year budget, which should enter force in 2021.
Why It Matters
The new fiscal stimulus package is a compromise between Southern European countries, which want big loans with no strings attached, and Northern European countries, which want loans to include some commitments to fiscal responsibility. But while these measures will complement other relief efforts announced in recent weeks, they have not put an end to the bloc's internal disputes. Just a day after the measures were announced on April 10, Italian Prime Minister Giuseppe Conte said that Rome is not interested in the ESM loans and that his government would instead continue to push for the release of debt backed by the entire European Union (or so-called "coronabonds"). Spanish Prime Minister Pedro Sanchez has also promised to continue insisting on the release of coronabonds.
The European Union's leaders will hold a virtual conference on April 23 to endorse the measures approved on April 9 and to discuss new ways to contain the economic impact of the COVID-19 crisis. Conte has threatened to block the summit's conclusions if the issue of coronabonds is not addressed. The discussion of debt mutualization, however, is a nonstarter for Northern European countries such as Germany, Austria, the Netherlands and Finland. Indeed, these countries' rejection of coronabonds is much stronger and more cohesive than their initial rejection of using the ESM for fiscal relief, which further reduces the chances of an agreement.
What's Next
This comes amid increasingly bleak forecasts that suggest the coming months will be hard for the continental economy. On April 12, European Central Bank Vice President Luis De Guindos warned that Europe will face one of the world's worst pandemic-induced recessions, and that the Continent's economy may not truly recover until 2021. Some EU countries are already slowly softening their economically disruptive quarantine measures: Spain allowed workers in some non-essential activities to return to work on April 13, while Austria will allow small shops to reopen on April 14. But with most of the Continent still on lockdown, Europe's economic prospects look dire for at least for the rest of the year, meaning the debate over how the European Union should support its struggling economies is far from over.
