In the upcoming European Union summit, Spain’s Prime Minister, Pedro Sánchez will propose an ambitious Coronavirus Recovery Fund for the countries most affected by the Coronavirus crisis. In a non-paper, Sánchez will claim that this fund can be financed through perpetual EU debt and will be distributed via grants to the EU countries hit hardest economically by the outbreak.
During the EU summit, which will take place on Thursday, Spain is planning to adopt a clear position on behalf of the countries in southern Europe that have been most affected by the crisis. However, France and Italy have both suggested different solutions, such as an intermediary solution that they can negotiate with Germany.
However, Spain believes that their own plan would help European economies to recover faster while avoiding huge debts. It is thought that a recovery fund (the same size as Italy’s total economy) would inject money directly to the worst-affected nations. These would come in the form of grants, rather than bailouts.
This ambitious plan is an alternative to the many measures already proposed by the Eurogroup. Most of which have largely focused on loans that would have to be repaid. Some of the ideas have included guarantees from the European Investment Bank and a €500 million bailout from the European Stability Mechanism. There have also been plans for the temporary suspension of employment schemes.
How Spain’s plan differs is that the fund will be focused on long-term economic recovery. In contrast, the bailout measures would provide essential but temporary liquidity during the early stages of the crisis.
The European Stalemate
At the moment, European countries are in disagreement as to how to finance the recovery. The Netherlands and Germany are opposing jointly issuing debt, while other countries are looking for mutualisation. Some European countries have been able to weather the storm financially. However, borrowing costs are creeping up for countries such as Italy, Portugal and Spain.
A solution must be found as, if a large European country cannot finance its debt, then this would put the Euro in critical danger. Spain’s solution of grants rather than loans would help to avoid an increase in European debt. Spain believes the grants can be financed through perpetual debt that is backed in the EU’s long-term plan and budget.
If Spain’s recovery plan was to be approved, the funds should be ready to enter the economy by January 1st, 2021 and support the next three years of the seven-year budget.
The EU Summit
On Thursday, via videoconference, EU leaders will meet to confirm the recovery plan. This will include the three-pillar rescue package, which consists of a credit line to the European Stability Mechanism, an unemployment insurance scheme and a €200 billion package from the European Investment Bank to SMEs.
January 14, 2021