Eurogroup Fails To Agree On Coronavirus Stimulus After Feud Erupts Between Italy And Netherlands

Three things are guaranteed in life: death, taxes and the Eurogroup failing to reach an agreement.

At exactly 2am ET, the EURUSD tumbled in a flashback to the dark eurozone sovereign debt crisis days of 2010-2015, when news broke that European Union finance ministers had failed to agree in all-night talks on more support for their coronavirus-hit economies.

Shortly after Eurogroup president Mario Centeno tweeted that he was suspending the discussions until Thursday: “after 16 hours of discussions, we came close to a deal but we are not there yet. I suspended the Eurogroup and continue tomorrow, Thursday. My goal remains: A strong EU safety net against fallout of COVID-19 to shield workers, firms and countries & commit to a sizeable recovery plan.”

After 16h of discussions we came close to a deal but we are not there yet.
I suspended the #Eurogroup & continue tomorrow, thu.
My goal remains: A strong EU safety net against fallout of #covid19 (to shield workers, firms &countries)& commit/ to a sizeable recovery plan pic.twitter.com/kGHoURgdrv

— Mário Centeno (@mariofcenteno) April 8, 2020

According to Reuters, diplomatic sources and officials said a feud between Italy and the Netherlands over what conditions should be attached to euro zone credit for governments fighting the pandemic was blocking progress on half a trillion euros worth of aid.

The finance ministers, who started talks at 1430 GMT on Tuesday and lasted all night with numerous breaks to allow for bilateral negotiations, are trying to agree a package of measures to help governments, companies and individuals.  They had hoped to agree on a half-trillion-euro program to cushion the economic slump and finance recovery from the pandemic, and turn a page on divisions that have marred relations as the bloc struggles with the outbreak.

But feuds emerged prominently again, one diplomatic source said: “The Italians want a reference to debt mutualisation as a possible recovery instrument to be analysed more in the future. The Dutch say ‘no’.”

In other words, Italy was hoping to use the coronacrisis to finally get its long-sought goal of federalized, mutualized debt, and yet the Dutch (and somewhere not as loud behind them the Germans) said “nee.”

An official who participated in the talks said at around 0400 GMT on Wednesday The Hague was the only one refusing to endorse a text that the ministers were expected to agree on to get endorsement for a new set of economic measures from the bloc’s 27 national leaders.

German Finance Minister Olaf Scholz said on Twitter: “In this difficult hour Europe must stand together closely. Together with (French finance minister) Bruno Le Maire, I therefore call on all euro countries not to refuse to resolve these difficult financial issues and to facilitate a good compromise – for all citizens.”

Hardly a new topic of contention, issuing joint debt has been a battle line between economically ailing southern countries like Spain and Italy and the fiscally frugal north, led by Germany and the Netherlands, since the financial and euro zone crises began over a decade ago.

To support economies burdened by coronavirus lockdowns, the EU has already suspended state aid limits and allowed member states to inflate their debt to spend more. But Spain, France and Italy say that is not enough and have cast the discussion about more support as an existential test of solidarity that could make or break the EU.

Further proposals under discussions include credit lines from the euro zone bailout fund that would be worth up to 2% of a country’s economic output, or 240 billion euros in total. The conditions for gaining access to this money remain a sticking point. Granting the European Investment Bank 25 billion euros of extra guarantees so it can step up lending to companies by a further 200 billion euros is another option.

The third is support for the EU executive’s plan to raise 100 billion euros on the market against 25 billion euros of guarantees from all governments in the bloc to subsidise wages so that firms can cut working hours rather than sack people.

Creating an emergency support fund issuing grants for medical supplies and health care is another idea, as is a French proposal to create a joint EU solidarity fund to finance long-term recovery.

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That said, if Europe does eventually agree, the combined pan-EU and national government responses could add up to the biggest fiscal support programme in the world, surpassing that of the United States, Reuters calculations showed. Below is a summary of what is eventually expected to be unveiled:

• Unemployment scheme: The EU Commission plan to set up an instrument for temporary Support to mitigate Unemployment Risks in an Emergency (SURE) where loans up to EUR100bn can be granted to member states (which helps to contain job losses in the Eurozone vs the US).
• Corporate support: The EIB announcement to set up a pan-European guarantee fund (EUR25bn proposal on top of 40bn support package announced last month). Question is how generous this will be.
• No coronabonds. Commonly issued debt to exclusively fund COVID-19 measures is unlikely to be agreed on. While advocated by Spain, Italy and France, there is staunch opposition from other parts of the Eurogroup.
• Open question on ESM credit lines: Loans from the European Stability Mechanism with loose conditionality attached are possible. Citi Rates Strategy notes that the ESM currently has unused lending capacities of EUR410bn but that a compromise is unlikely today. Southern European countries have generally opposed this, particularly the stigma attached and the conditionality.

While the EU is no stranger to protracted horse-trading, the discussion exposes rifts in the bloc and further strains its unity, already damaged by the euro zone crisis and the 2015-16 migration crisis, which partly contributed to Brexit.

So far the ministers, discussing via videoconference through the night with some of them dozing off at times, according to officials present, have been left frustrated. Le Maire was quoted as saying at one point during the night, according to one official who participated: “Shame on you, shame on Europe. Stop this clownesque show.”