ESM Chair Calls for Additional 500 Billion to Tackle COVID-19

In the discussion about further financial aid for Europe’s economy to deal with the economic fallout of COVID-19, head of the European Stability Mechanism (ESM) Klaus Regling has stated that  “at least another 500 billion” from European institutions will be needed.

Previous Agreement

A fortnight ago, European finance ministers had already reached an agreement after difficult negotiations on a COVID-19 rescue package worth €500 billion, which comprises three mechanisms: loans from the European Investment Bank for small and medium-sized companies, a European furlough work allowance, and precautionary credit lines from the ESM rescue fund.

However, in view of the damage caused by the pandemic and the fact that that damage will continue, the amount of the contribution appeared to be limited ab initio ⁠— especially as IMF projections see the EU economy plunging by 7.5 percent.

Further support through the European Recovery Fund ⁠— a so-called reconstruction fund for the economy ⁠— is also under discussion. Here, the EU Commission recently contemplated a volume of €1.5 trillion, which is €1 billion beyond Regling’s suggestion.

Regling’s Strong Support from Germany

In addition to the amount in question, Regling emphasized that new measures had to be discussed impartially, but that existing institutions had to be utilized primarily because doing so will be “easier.”

In Germany, Regling’s idea has particularly strong support. In fact, Germany’s finance minister Scholz has long been advocating for a coordinated European economic stimulus package. As a result, Scholz had already concurred upon a proposal by the EU Commission for the European Recovery Fund at the Eurogroup’s previous meeting.

Key Details Still Need to be Worked Out

The willingness to invest thus exists in spirit. However, the crux of the actual volume and how it would be financed, continue to divide Europe these days. The from southern states favored the idea of eurobonds has been rejected not only by Germany but also by Regling, who fears that it would take too long for it to be facilitated.

Scholz, meanwhile, also has constitutional concerns regarding eurobonds. With Germany becoming fully liable for any failed payments of other nations, Germany’s Federal Constitutional Court could intervene rather swiftly, as applicable German law may be violated. Germany’s government is thus in favor of facilitating the European Recovery Fund via quasi bonds that are guaranteed by a European institution with, such as Regling’s ESM. It would allow for leveraging the funds, in other words it would make it conceivable to utilize them more than once. Moreover, the fund is also said to be part of the regular EU budget.

Italy’s Position on the ESM

Italy, meanwhile, continues to differ. The Five Star Movement fundamentally rejects the use of the ESM, while other voices of the government have started to deviate from Prime Minister Giuseppe Conte’s dictum. According to Conte, Italy does not need the ESM as it is not a “suitable instrument” for overcoming the fallout, and the Eurogroup’s first plan regarding a recovery fund was thus “inadequate.”

Elsewhere in Europe, the choice of words has become much more conciliatory. In Spain, for instance, Prime Minister Pedro Sánchez praised the efforts taken so far. In a speech on Saturday, he stated that the meetings with the heads of state and government of the European Union were “bearing fruit.”

The Spanish government was no longer seeking to change the agreement already reached within the European Union, though it will demand that all programs be implemented as soon as practicable.

Accordingly, the Spanish government will present its own proposal for a joint financing option at the European summit starting today. Other nations will do the same to find a solution that is acceptable for parts of Europe that have been hit the hardest and the fiscally conservative nations such as Germany.

However, people should make no mistake. As much as the European Union has emphasized its commitment to unity and solidarity for the better part of its history, the upcoming EU summit will be dominated by division based on the different needs in what has arguably become the union’s most significant challenge since its creation.