As outbreak blows up finances, a limit to EU solidarity



The Associated Press

BRUSSELS — The European Union is taking unprecedented action to help member countries endure the massive economic shock of the virus outbreak, but some nations are resisting the idea of shared borrowing to cover the heavy costs — suggesting that even during this crisis there are limits to solidarity in a bloc that is trying to reaffirm itself after Brexit.

As governments scramble to put together hundreds of billions of dollars to save lives as well as companies and families from going bankrupt, many of the worst-hit countries in Europe are also those that can least afford the costs, like Italy.

The EU’s executive has temporarily set aside its strict rules on spending to give governments the leeway they need to keep their economies afloat. That will only go so far, however, as it would leave the most affected countries managing their own worsened finances once the crisis has abated.

Its governments have so far stopped short of bigger action involving breaking a longstanding taboo: joint borrowing among countries that share the euro currency. Leaders are expected to discuss the question in a teleconferenced summit on Thursday.

“To which extent Europeans help each other in this acute emergency can shape popular perceptions of what Europe stands for — and for a long time to come,” said Holger Schmieding, the chief economist at Berenberg bank.

Finance ministers from the 19 EU countries that use the bloc’s common currency, the euro, have agreed on letting countries borrow up to 2 percent of GDP from the European Stability Mechanism, a bailout fund set up during the debt crisis a decade ago.

The fund took part in the rescue of indebted countries such as Greece and Ireland in the last decade. It is backed by all 19 eurozone countries, and in a sense would represent shared finances in another form. It has lending firepower of $444 billion.

The credit line may be enough to keep indebted countries such as Italy from going bankrupt in coming months, but could still leave them with longer-term debt trouble. Money from the rescue fund might not even cover Italy’s additional spending, whose deficit is estimated to run as high as 10 percent of GDP this year, from under 3 percent currently. It would send its huge public debt pile of 132 percent of GDP even higher.

That jump in debt and deficits would, in normal times, violate EU rules, but the bloc loosened them. It has also lifted bans on state aid, which aim to keep countries from favoring home industries, so that they can now support companies suffocated by lock-downs.

“In a couple of weeks, we took measures that only a few months ago were impossible to imagine,” Europe’s economic and monetary commissioner, Paulo Gentiloni said.

Yet the eurozone finance ministers who met Tuesday to lay the groundwork for the leaders’ meeting couldn’t overcome resistance to so-called “coronabonds,” shared debt backed by all 19 member countries. The idea would be to ensure even the hardest-hit member nations can borrow at sustainably low interest rates as their spending balloons on hospitals and measures to keep businesses from going bankrupt due to the shutdowns.

Italy, for one, could spend without having to worry down the road that international investors would worry about the country defaulting. That is what happened in 2010-2012, when investors began demanding unsustainably high interest rates to lend to Italy, spawning a financial crisis that almost broke up the eurozone.

Long rejected by northern European countries, that the shared bonds idea is even being considered shows how serious the situation is.

Germany and the Netherlands have long objected to common borrowing because it would put them on the hook for the finances of shakier countries and reduce incentives for other countries to control their deficits. German Chancellor Angela Merkel was reported to have told legislators in 2012 that there would be no common borrowing “as long as I live.”


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