After prolonged and difficult negotiations, including verbal confrontations between Italy and Germany, Europe has found its first united response to the economic crisis caused by COVID-19.

Eurogroup Rides to the Rescue

On Thursday evening, Europe’s finance ministers – the Eurogroup – agreed on an aid package which primarily seeks to mitigate the crisis’s impact on workers, companies, and European states, by investing more than €500 billion.

Eurogroup chair Mario Centeno spoke of the epochal agreement, which he said took a “huge effort” but was nonetheless “facilitated quickly.” However, the Eurogroup needed three days and various rounds of negotiation to conjure an agreement. Even more important: decisions on crucial issues were postponed in order to finalize the aid package immediately – including the question of joint debts via Eurobonds.

Specifics of the New Agreement

The agreement now adopted contains three elements. The first component is made up of precautionary credit lines of up to €240 billion from the European Stability Mechanism (ESM). The ESM was created in 2012 at the height of the past Euro debt crisis. Secured by deposits from the Euro states, it borrows capital on the market and passes it on under certain conditions to countries that would have to pay higher interest rates on the market themselves or would no longer receive loans.

Secondly, the European Investment Bank (EIB) will create a fund for companies affected by the crisis. The EU states are to participate in accordance with their EIB shares. The fund is expected to mobilize up to €200 billion through levers and guarantees.

Thirdly, a furlough program coined “SURE,” which proposed by the EU Commission and is worth €100 billion will be implemented. Above all, it intends to provide financial security for national furlough schemes and encourage those EU member states who do not yet offer any furlough work benefit schemes to consider and create them.

The Agreement Was Not Easy to Reach

Despite the newfound temporary unity, the Eurogroup faced internal dissent on many propositions, particularly regarding the conditions attached to aid. For example, the Netherlands sought stringent conditions to access the ESM credit lines. Italy, in particular, opposed the idea. The compromise that has been facilitated now stipulates that although the ESM credits are unconditional, the funding can only be utilized for direct and indirect health costs. In the event that money is needed from the ESM for the economic consequences of the crisis, the usual strict reform commitments would apply.

Besides these elements, the ministers also seek to pave the way for a post-crisis recovery program. It is intended to become part or appendix to the seven-year EU budget that is currently being discussed. The fund is to be filled with several hundred billion euros. Common European bonds – the so-called Eurobonds – remain an option, at least in theory. However, two prominent figures did immediately reiterate their opposition to any Eurobonds agreements. Netherland’s finance minister Wopke Hoekstra emphasized that he did not consider Eurobonds an option and received support from German Chancellor Angela Merkel, who also repeated her stance. Merkel did, however, praise the agreement made yesterday. In addition, she pledged Germany’s participation in any additional economic stimulus program.

What’s the Next Step?

While the agreement is undoubtedly a first step in the right direction, many details remain open. Moreover, the package finally agreed to is smaller than the European Central Bank had urged. Its estimates were put at €1.5 trillion – triple the amount the EU has agreed upon now. The discrepancy could become a reason for concern.

The wording in the agreement is deliberately vague and allows for interpretation, particularly regarding future Eurobonds. However, it will now be up to the EU Council to take the next step and follow up with a post-crisis program, which could be discussed next week already. At this stage, it seems inconceivable, however, that a quick compromise and agreement between the southern states and the fiscally-conservative north is realistic.

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