EU ministers’ stalemate, Scicluna: ‘If EU fails in this hour of need, it can pack up’

Eurogroup finance ministers have rallied behind a call for compromise by Malta, after failing to reach an agreement over the bloc’s fiscal response to the COVID-19 emergency, following a 16-hour long teleconference.

The Eurogroup meeting, which kicked-off one hour later than planned, had to take several breaks before calling it a day yesterday morning. The all-night talks focused on the ways to use EU’s bailout fund, namely the European Stability Mechanism (ESM) and on whether or not to include a massive liquidity injection from eurobonds.

Finance Minister Edward Scicluna told BusinessToday the major disagreements registered were between Nordic countries and southern member states – but not Malta.

Italy and the Netherlands were found clashing on the conditions for eurozone credit for governments fighting the pandemic, with the latter insisting on “phase” conditionality in case of using the ESM’s credit lines; Rome demanded that no conditions be attached.

According to reports, Italy’s Finance Minister Roberto Gualtieri said his government will not accept a final report sent to EU leaders unless it explicitly mentioned debt mutualisation as a tool for the economic recovery. That would be akin to all member states sharing liability for debt incurred by other member states, so as to improve credit ratings.

“We Maltese, by our very nature, are somewhere in between these two extremities,” Scicluna said. “In general we are for solidarity. We have shown it in the past with regards to countries needing a bail-out but we also want our liabilities known, apportioned and capped.”

Scicluna said that Malta was in favour of using the ESM, like the International Monetary Fund, and remove its existing stigma that it be used for this crisis or any other one in the future. “However on Tuesday night, we as Maltese made a plea to our colleagues to accept the compromise text since the health and economic problems out there are much, much bigger than the technical issues and problems we were discussing in the meeting,” Scicluna said.

“If the EU fails in this hour of need it can pack up.”

He said there were many members states who supported his plea. “I have no doubt that today we will see an agreement but not before some showmanship and some cliffhanger negotiations,” Scicluna said. “I know. I am longest serving finance minister in the meeting.”

What’s on the table

The EU presidency had already taken into consideration the various red lines between the members, the areas of agreement and above all what the Commission and other EU institutions were proposing during yesterday’s meeting: in short, the Eurogroup had before it a compromise text.

“Essentially it contained a package recognising the flexibility given to individual governments by the Commission so far regarding state aid and basing its added boost through four pillars which are meant to assist the countries face the enormous physical and economic health challenges and leading to the much sought economic recovery,” Scicluna said.

The first two pillars dealt with how member states should make use of their European financial institutions – the European Investment Bank and the ESM.

The European Investment Bank was offering a €25 billion guarantee fund to member states, which translates into €200 billion in financing for EU enterprises, mostly SMEs.

The ESM was to offer credit lines worth up to two percent of output of the EU members, or €240 billion in total. But normally ESM loans come with stringent austerity conditions. Italy wants to see them redesigned for the corona crisis.“There were those who expected that we behave like a bank and issue a Eurobond, referred to as coronabond,” Scicluna said.

“The bottom line is to help weaker countries who would be able to issue debt and expect mutualisation of a guarantee, for which all EU countries would be jointly and severally liable. Failing that it could issue credit lines to Eurozone countries and balance of payments facility to non-Eurozone ones.”

Wopke Hoekstra, the Dutch Finance Minister maintained his hardline stance against issuing a common debt with other EU nations to share the burden of the COVID-19 pandemic. “The Netherlands was and remains against the idea of Eurobonds; we think this will create more problems than solutions for the EU. We would have to guarantee debts of other countries, which isn’t reasonable. The majority of the Eurogroup shares this view and does not support Eurobonds,” he wrote on Twitter.

The third instrument - SURE - is also a loan-based instrument to provide financial assistance related to wage and jobs support. The fourth instrument is the creation of a recovery fund to invest in the EU in the aftermath of the crises.

Europe’s economies now face the deepest recession since the Second World War, and ministers had hoped to agree on a €500 billion programme to cushion the economic shock. Southern states, spearheaded by Italy, which has been hardest hit so far by the pandemic, advocated for sharing the costs of the recovery and also loosening austerity conditions on loans. Northern, fiscally-conservative countries, led by the Netherlands but supported by Germany and Austria, had been reluctant. They fear that sharing the burden and weakening conditions would lead to a less-disciplined economic policy for highly-indebted southern EU countries.

Ministers will get together again on Thursday, but positions are unlikely to change significantly.