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EU fails to agree on mitigation as divisions persist

Countries in hardest-hit south face off hawkish northern states over sharing costs of looming recession

EUROPEAN Union finance ministers failed to agree on a strategy to mitigate the economic impact of the Covid-19 pandemic, prolonging a paralysis that casts doubt over the bloc's ability to weather the crisis.

In an emergency teleconference that lasted more than 16 hours, finance chiefs could not reconcile their contrasting visions for the steps needed to help European economies recover, as countries in the continent's hardest-hit south were pitted against hawkish northern states over sharing the costs of the looming recession.

Faced with what could be the deepest recession on record, the acrimony highlights how Europe is mired in the same old divisions that almost tore it apart during the sovereign debt crisis almost a decade ago. A new call is scheduled for Thursday, though it is unclear what could push countries to move from their red lines, not least because a massive intervention by the European Central Bank has taken off some of the market pressure to strike a compromise.

Two officials familiar with the discussion said the main reason for the breakdown was a dispute between the Netherlands and Italy over the conditions attached to the potential use of credit lines from the euro area's bailout fund to finance the spending spree needed to cushion the blow from the pandemic.

Ministers also sparred over the wording of a joint statement hinting at the possible issuance of joint debt to finance the response.

Italian bonds fell, with 10-year yields climbing 16 basis points to 1.77 per cent, the highest level since March 19. The euro fell against most of its group-of-10 peers, dropping 0.4 per cent to US$1.0853.

French Finance Minister Bruno Le Maire and his German counterpart Olaf Scholz sent tweets after the meeting broke down, saying they would work with one another and calling on all European nations to rise to the "exceptional challenge" to reach an ambitious accord.

The ministers had been tasked by EU leaders to come up with a toolkit of measures to address the economic impact of the pandemic by the end of this week.

But even as the virus continued to engulf their economies and medical systems, they were unable to move past traditional dividing lines, putting in question the next steps in the continent's efforts to manage the economic downturn.

Three main proposals are being discussed to weather the crisis: employing the European Stability Mechanism (ESM), the euro-area's bailout fund, to offer credit lines worth up to 2 per cent of output of the bloc's members; the creation of a pan-European Guarantee Fund to be managed by the European Investment Bank that could mobilise more than 200 billion euros (S$310.5 billion) in liquidity for companies; as well as an employment reinsurance scheme worth 100 billion euros.

The French government also put forward a plan that would create a temporary reserve worth 3 per cent of EU gross domestic output, have a lifetime of as long as 10 years, and would be funded by the joint issuance of debt to share the cost of the crisis. The plan is controversial as it resembles an idea backed by several euro-area countries for so-called coronabonds - joint debt instruments that would ease pressure on highly indebted countries like Italy and, to a lesser extent, Spain and France.

While Germany has said that it supports measures to bolster an economic recovery, it has baulked at any proposals that would see member states sharing debt. Other countries such as the Netherlands and Austria also oppose joint issuance, wary that they could end up on the hook for spending in the poorer south.

"The Netherlands was, is and remains against #eurobonds because this increases risks in Europe instead of reducing them," Dutch Finance Minister Wopke Hoekstra tweeted on Wednesday, adding that countries could not agree on attaching conditionality to the ESM lines of credit. BLOOMBERG


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