EU Inches Towards Economic Virus Plan After Infighting

While the United States, China and other world powers have unleashed tremendous fiscal firepower to fight the economic chaos caused by coronavirus, Europe has not joined battle, riven by infighting.

For now, the EU's 27 member states are responding to certain recession with individual spending plans, in which rich countries like Germany and the Netherlands have the means to spend big but indebted Spain and Italy, caught on the virus frontlines, do not.

To better share the burden, capitals are kicking around a few proposals, but grievances blew out into the open when the northern countries slapped down a call for a joint budget and borrowing to help rebuild the economy.

Here is a summary of the ideas being talked about ahead of a crunch meeting of EU finance ministers on Tuesday to find a way forward:

Italy and Spain, with the backing of France and a few others, are calling for the creation of a financial "instrument" through a common loan by all 19 countries that use the single currency.

These instruments -- sometimes called "corona bonds" -- would pool borrowing by eurozone countries to spend on the economic problems caused by the coronavirus, and for a limited time.

The mutualisation of debt by European countries has long been a goal of the particularly indebted countries of southern Europe, such as Italy, but been declared off limits by the countries of the north.

Member states whose debt is considered the safest, led by Germany, have always refused to mutualise their risk for the benefit of countries considered less financially virtuous.

Despite passionate pleas by Rome and Madrid, Berlin's red line will most likely not move.

Also strongly opposed to this idea, the Netherlands has proposed an emergency fund of up to 20 billion euros ($21.5 billion)in grants, but without the capacity to borrow.

As a compromise, Germany is willing to turn to the European Stability Mechanism, created in 2012 during the eurozone debt crisis to help states facing financing problems on the markets.

"My suggestion is to use existing instruments quickly and effectively" with a three-pronged plan based on the ESM, European Investment Bank and unemployment reinsurance at the EU level, German Finance Minister Olaf Scholz Scholz told the Funke newspaper group Friday.

With a strike force of about 420 billion euros, the ESM provides credit to countries in difficulty, but in exchange, governments must implement belt-tightening and reforms - as was the case for Greece.

At a summit two weeks ago, Italy and Spain refused this avenue, seeing the conditionality demanded as humiliating -- they would have to agree to external policy oversight -- especially in a health crisis that was not of their own making.

But Scholz on Friday insisted: "There won't be any senseless conditions as there were sometimes in the past."

Germany and the Netherlands have touted other acts of solidarity, including the decision by the EU's executive to suspend deficit and debt rules during the course of the crisis, as well as lift bans on state aid.

The European Investment Bank, run by the 27 member states, is proposing a pan-European guarantee fund. It would be supported by guarantees from the member states, which would make it possible to mobilise up to an additional 200 billion euros mainly targeted at European small business.

The European Commission has proposed a bloc-wide guarantee that could raise 100 billion euros to aid strained national unemployment schemes as millions of jobs are hit by the coronavirus outbreak.

In the complex scheme, the bloc's 27 national governments would give a temporary budget to Brussels so the EU executive could raise money on the markets to lend to member states struggling to help employees suddenly left without work.

The commission has also suggested using the EU's long-term budget for 2021 to 2027, currently under negotiation, which could be beefed up to act as a "Marshall Plan" to deal with the crisis.