Where do you find €500 billion? Europe wonders

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“Who wants to fund €500 billion?” is the European game of the week.

EU leaders will meet via conference call on Thursday to bicker over the creation of a “recovery fund” to help their economies grow back into shape after the shock of the coronavirus outbreak.

Governments have finally agreed on the principle of such a fund. They may even be in broad agreement about how to spend the money. The problems begin when they start talking about where the money should come from.

France, supported by Italy, Spain and others, is pushing forward the proposal of a fund that would borrow on the markets the equivalent of 3% to 4% of the EU’s gross domestic product — €400 to €500 billion — in the form of joint debt. That would help finance the recovery “according to everyone’s needs, not to its relative size,” French President Emmanuel Macron said last week.

Klaus Regling, head of the European Stability Mechanism (the eurozone bailout fund), agreed in an interview with Italy’s Corriere della Sera that another €500 billion would be needed to help steer the European economy’s recovery from the coronavirus damage. But “it could be more,” and the EU “must discuss new tools with an open mind,” he added.

National governments have done their part, with fiscal stimulus plans that amount to about 3% of Europe’s GDP. The European Central Bank is buying up to €900 billion of bonds to keep yields under control and allow governments to finance themselves at reasonable rates. And different EU institutions — such as the eurozone bailout fund or the European Investment Bank — have also contributed a total of about €400 billion to help the recovery.

But Europe, and notably the eurozone, is once again the theater of a conflict between countries flaunting their past fiscal rectitude — such as Germany and the Netherlands — and those who point out that responsibility for COVID-19 cannot be laid at the door or any individual government.

Advocates of the French proposal, on the other hand, insist the recovery fund wouldn’t mark the birth of the contentious “Eurobonds” that were discussed in the heat of the euro crisis 10 years ago: The fund would be temporary, with a specific purpose. But that argument is met by the skepticism of those who fear that, as a precedent, it might open the door to a much-dreaded uncontrolled “risk sharing” among eurozone members.

The question, then, if the fund cannot be financed by joint debt because the differences prove insurmountable, is where to find the missing €500 billion? Leaving the burden up to national governments would penalize the weakest countries, whose past crippling debt loads are already increasing because of the fiscal effort they are making to cushion the virus’s blow.

Yields on Italy’s 10-year bond TMBMKIT-10Y, 1.949% rose again on Monday, to more than 1.9%, up from 1.2% a few days after the ECB announced its pandemic program on March 18.

Persistent uncertainty or indecision on the EU’s part could lead markets to worry about the capacity of fragile economies to fund themselves in the coming years, precipitating another European crisis. Then the price to pay would be much higher for the eurozone than the price of a little financial solidarity now.

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