Rival plans for EU crisis fund signal bumps in the road to come

PARIS: European Union governments are trying to forge a consensus over how to provide aid to the countries hardest hit by the coronavirus pandemic.

With France and, crucially, Germany proposing a jointly-financed recovery fund to help the region cushion the blow from the steepest recession in living memory, the outcome of the talks could determine the bloc’s future direction and have global ramifications.

Negotiations will formally begin this week, when the EU’S executive arm is due to unveil its own proposal that will form the basis for discussions, though dividing lines have already been drawn. France and Germany want the fund to make grants to countries and sectors most in need, while a group of rich member states, including Austria and the Netherlands, say they will only agree to concessional loans for those that need it.

Here’s a comparison of the two plans:

> Size

€500bil France and Germany proposed a (Us$544bil) recovery fund. The rival group, encompassing Austria, the Netherlands, Sweden and Denmark, doesn’t specify the size of the recovery fund, suggesting that the bloc needs to make an assessment of its funding needs first. The fact they haven’t put forward a number suggests that there’s room for compromise here.

> Financing

France and Germany want the commission to issue bonds. Their opponents accept that a jointly-financed fund on top of the regular EU budget is needed. They don’t specify how it will be paid for, but the only way to create such a fund would be via debt issuance or direct contributions, and debt looks far more palatable.

The four hardliners’ main red line is debt mutualisation -- which would mean the rich countries being on the hook for the liabilities of the rest. The Franco-german proposal stops short of full debt mutualisation, so there’s common ground here too.

> Grants vs loans

The most contentious point is whether money from the recovery fund will be distributed in the form of loans to be repaid by the beneficiaries, or grants, which will be covered by the joint EU budget.

Austria and its allies want a model similar to the one used during the sovereign debt crisis. Their opponents including France and Italy say such loans will add to the debt burden of struggling countries, testing investor confidence and weighing on their future growth prospects with the danger that the two halves of the EU drift further and further apart in economic terms.