By Luca Nardini, 89 Connect

Last Thursday night EU leaders tasked the European Commission with presenting its proposal on the “Recovery Fund” by 6 May. This was the result of the EU summit, although European leaders are not yet fully unanimous on a big variety of topics such as the amount of money it will distribute to Member States.

The head of the German government Angela Merkel expressed disagreement on how to finance said Recovery Fund, be it with grants or loans. One thing is clear – and that is the fund will be linked to the European budget for the next seven years, the so called Multiannual Financial Framework (MFF) which in turn needs to adapt to the new circumstances, post-corona crisis. To this regard, Ms Merkel stated she is open to offering key financial support for a coronavirus recovery package worth as much as €2 trillion, provided she has the chance to evaluate how it would be used before committing.

On the one hand, Dutch prime minister Mark Rutte stated that it should be rather a loan-based system. On the other hand, France, Italy and Spain led demands for grants to stricken economies. During the summit, French president Emmanuel Macron warned of the seriousness of the financing that needs to be implemented. His Italian counterpart Giuseppe Conte, who has been quite under pressure in the Italian opinion lately to gain immediate financial aid from Brussels, called for grants by the “second half of the year”.  However, Ms Merkel insisted that any funding borrowed on the markets must ultimately be paid back.

In short, while a consensus is starting to emerge on the overall framework to overcome what is likely to be the deepest recession in European Union history, EU leaders did not go into the details of the economic response in their four hours teleconference. European Commission President Ursula von der Leyen acknowledges that GDP will fall everywhere, but it is no secret that it will fall more sharply in some Member States than in others.

Up to this point, to support Member States and to stimulate the economy the European Commission has put forward an ‘Economic Response Package’ which has been described as a “safety net of liquidity” to protect countries, companies and workers. At the very early stage of the crisis, the Commission suspended the Stability and Growth Pact – the EU’s fiscal rules – so that EU states could invest more than their actual expenditure ceiling and in spite of debt levels to fight the Covid-19 crisis. Secondly, it eased state aid rules, intended to preserve fair competition within the Single Market, to allow investment in strategic sectors, such as the production of medical equipment. Thirdly, it channelled EU structural funds, used to fight regional inequalities, so that countries could use them in the corona crisis response, creating a pot of €37bn. Lastly, it proposed to extend the scope of the European Solidarity Fund, so that it covers public health emergencies too, unlocking €800mln. In addition to all the above-mentioned measures, the Commission also put forward its ‘Support to Mitigate Unemployment Risks in an Emergency’ (SURE) initiative a €100bln instrument based on guarantees.

However, in such an unprecedented crisis this is not nearly enough. The Eurogroup, therefore, agreed on a €540bln response package. Other EU institutions such as the European Investment Bank (EIB) and the European Central Bank (ECB) also intervened. The former proposed to create a new corona fund worth €25bln in the form of guarantees targeting the private sector and especially the small and medium-sized companies. The latter, and perhaps the strongest financial tool implemented to face the crisis, announced the launch of a new corona-bond buying programme worth €750 bln to buy public and private debt in the markets.

Nevertheless, to date, the main instrument designed to tackle a financial crisis in the EU is the so-called European Stability Mechanism (ESM). The ESM will make available a credit line under the name of ‘Pandemic Crisis Support’ which will consist of around €240mln in the form of soft loans for countries. However, the ESM conditionality was the main bone of contention and blocked its approval for days, as some member states, such as the Netherlands, were asking stricter conditions for hard-hit Southern countries like Italy and Spain.

“We are at a moment where companies are not going to invest because there is a lot of uncertainty,” declares Grégory Claeys, a research fellow at Brussels’s think-tank Bruegel. To this purpose, President von der Leyen, who will have to present a Commission’s proposals by Mid-May, Appropriate policy response is needed on behalf of Brussels in order to tackle the high uncertainty depressing investments in the foreseeable future.