EC’s coronavirus bailout package, an ambitious project

Thursday, 2020-05-28 15:58:18
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Members of the European Parliament are seen during a plenary session on a new proposal for the EU's joint 2021-27 budget and an accompanying Recovery Instrument to kickstart economic activity in the bloc ravaged by the COVID-19 outbreak, in Brussels, Belgium, May 27, 2020. (Reuters)
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NDO – The European Commission (EC) has proposed a massive bailout package to help EU member economies recover after the COVID-19 pandemic. Yet, with its array of grants, credits and guarantees, the ambitious project remains in doubt, as it will generate a huge debt burden for the EU and necessitate increases in member states’ contributions to the EU budget.

The emergency aid package was discussed by the EC for weeks before being submitted to the European Parliament (EP) by EC President Ursula von der Leyen for consideration as well as being sent to EU member countries for discussion and approval. The biggest and most urgent goal of this project is to help the EU’s nations and economic sectors worst affected by the disease quickly recover in the “post-COVID-19” period. At the same time, the project aims to protect the common market of 450 million people from the risk of being “shredded” due to differences in terms of growth and prosperity rates among EU economies in the event of a recession in late 2020, predicted to be the most profound ever. Under the plan, the EC will seek and mobilise loans of at least EUR500 billion from financial markets to establish a fund to support EU member states in dealing with the economic consequences of the pandemic.

The EC’s project comes in the context of most EU countries gradually easing lockdown measures and restarting their economies, whilst being confronted with many financial issues. In particular, in relation to the wealthier countries in northern Europe, such as Sweden, Denmark, Austria and the Netherlands, the need to borrow to cover domestic economic plans is not too urgent. However, a number of southern economies, such as Italy, Greece, Spain and Portugal, long dependent on the tourism industry, are struggling with their public debt burden due to their recent expenditures on battling COVID-19, and it is extremely difficult for them to mobilise capital for economic recovery.

In its latest report on Eurozone’s financial stability, the European Central Bank (ECB) warned of a potential risk of new “public debt mountains”, stemming from the costly anti-epidemic measures, raising concerns about the possible default of many countries in the region, even the risk of the collapse of the Eurozone. The bank pointed out that the goal of maintaining public debt below 6% of GDP, which has inherently been very difficult to achieve, now becomes even less feasible amid the current COVID-19 crisis. Governments’ massive spending packages can help mitigate the impact of the disease and boost economic recovery, but will cause a rapid increase in public debt. The ECB predicts that with countries’ loans worth hundreds of billions of euros used to support the economy, the Eurozone’s public debt will possibly climb to 22% of GDP this year.

In the context of the financial difficulties faced by many countries and the urgent objectives of the post-pandemic economic recovery period, the EC-proposed bailout package was considered necessary by the majority of member nations, as it will provide timely support to help member states who have now become “exhausted” in the fight against COVID-19, thus reviving the sustainable economic block of the EU. For that reason, the EC’s economic reconstruction project has been backed by leading EU economies. Last week, Germany and France proposed a number of key points for the EU economic reconstruction fund, which could raise up to EUR500 billion from financial markets for the EC’s plan in order to directly support member economies worst affected by the pandemic. Germany even supported the implementation of the “rescue plan” in the form of grants instead of loans. With the aforementioned proposal, Germany and France have eliminated the controversial “corona bonds” programme and advocated using funding from existing financial mechanisms in Europe instead. The EC’s project can meet the capital needs of the southern member states without significantly increasing national debt.

However, doubts still remain, especially with regards to how the project will be implemented, as the EC borrows capital from markets to grant to the member countries most in need, not on-lending. More importantly, northern countries are dissatisfied with the way in which the southern members spend and funding for the new project will be a common debt of the EU. To repay this debt, it is not being ruled out that member states’ budget contributions will increase, or that more taxes will be enacted.

Undeniably, the EU economic reconstruction plan is urgent in the current context. Yet, with many internal divisions, negotiations on such an ambitious project are likely to be complicated and prolonged.