Merkel Plan for EU Debt Meets Opposition From Budget Hardliners

Merkel Plan for EU Debt Meets Opposition From Budget Hardliners(Bloomberg) -- The opposition to plans for the European Union to collectively finance its response to the coronavirus recession is taking shape after four members proposed a temporary fund for emergency loans as an alternative.In a joint paper, the leaders of Austria, Denmark, Sweden and The Netherlands, sometimes dubbed the “Frugal Four,” reiterated their opposition to joint debt and any direct grants and to an increased EU budget, throwing cold water on the initiative set out by German Chancellor Angela Merkel and her French counterpart Emmanuel Macron on Monday.“Our objective is to provide temporary, dedicated funding through the MFF and to offer favorable loans to those who have been most severely affected by the crisis,” the four countries wrote. “What we cannot agree to, however, are any instruments or measures leading to debt mutualization nor significant increases in the EU budget.”The MFF, or Multiannual Financial Framework, refers to the EU’s seven-year budget.Countries like Italy and Spain have been banking on the EU’s long-anticipated recovery fund to help them rebound from the economic devastation caused by the pandemic. The European Commission, the EU’s executive arm tasked with formulating a blueprint, will present its plans on May 27.Even though EU leaders have agreed on the need for such a fund to assist with the recovery, they have different views whether it should disburse loans or grants, what its total size should be and what the money should be spent on. And while they’ve broadly accepted that some of the money will come from jointly-issued EU debt, how much the bloc will raise on the markets remains a point of dispute.In an effort to speed up the discussions, Merkel and Macron threw their weight behind a plan to allow the commission to issue 500 billion euros ($545 billion) of bonds, with the proceeds going to help member states affected most by the pandemic. The agreement marked a significant shift for the German leader who has previously resisted French calls to shoulder more of the burden of the European recovery.Controversially, recipients of the funds won’t need to pay the EU back and the securities would be financed collectively. That means richer countries, like Germany, would be bankrolling poorer ones. The proposal will need unanimous approval by all 27 members of the EU and the bloc’s parliament.While the Franco-German plan foresees the issuance of 500 billion euros in debt by the European Commission on behalf of the entire bloc, Merkel has said this isn’t debt mutualization, as each country would be on the hook for part of the issuance only, in line with its share in the EU’s economic output.The main points of the four nations’ proposals are:Creating scope for Covid-19 funds in the EU budget by “reprioritizing” funds, not by increasing the budgetOne-time, two-year emergency fund based on “loans for loans approach”Loans based on needs assessment, targeting sectors and segments most hit by the virus and toward research, innovation, health sector resilience and climate goalsLinked to a “strong commitment to reforms and the fiscal framework” and to adherence to rule of law and anti-fraud measuresFor more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.