EU states still divided over recovery plans, but some progress made

A big divide remained between the member states of the European Union on whether any coronavirus recovery aid should be handed out as subsidies or loans.

EU leaders were set to meet via videoconference the next day to decide how to kickstart growth after the coronavirus pandemic.

They were expected to discuss the creation of a Recovery Fund but since there are disagreements, no final agreement is expected.

“For some member states it is important to have grants or subsidies, while for others it can only be loans. There is a big divide and we need to find the right balance,” one official told Reuters on condition of anonymity.

“The question is what tools we use for solidarity - eurobonds or something else,” the official, who was involved in preparing the leaders’ summit, reportedly said.

European Central Bank policymaker Olli Rehn said on Wednesday that the EU must agree a package to address the economic impact of the new coronavirus as the bloc’s future as a political community was at stake.

“I find it essential that the European Council tomorrow would come up with a convincing package in order to mitigate the economic effects of the crisis, especially for the weakest countries,” Rehn, who is Finland’s central bank chief, said at a news conference.

“The difficulties caused by (the virus) are not due to any single country’s reckless management of finances. It is therefore necessary to support the most severely hit countries," he added.

According to Italian newswire ANSA, which also cited sources, there wasn't unanimity regarding the amounts required, the sectors that require aid and on what the best instruments are to address the situation.

The hope reportedly was that the European Commission would be tasked with drafting a proposal that might be approved in June and July.

It was also revealed that the leaders of Germany, France, Italy, the Netherlands and Spain had spoken on Monday to try and reach a consensus.

Indeed, German Chancellor Angela Merkel had agreed to a larger EU budget and to the issuance of joint debt via the European Commission to finance aid.

The proposal reportedly revolved around the EC borrowing against the long-term EU budget in order to leverage the resources made available.

Euro area periphery debt had nevertheless come under selling pressure recently, with analysts at Morgan Stanley pointing out the various factors which might be at work.

Included amongst those were the limited nature, in time and quantity, of the European Central Bank's most recent bond buying programme, the fact that the same ECB programme could cover EU states' issuance of debt in 2020 but perhaps not selling by investors if they chose to do so.

A further problem was the question of debt sustainability given already high debt-to-GDP ratios in countries such as Italy and the fact that the pandemic implied a 'scar' in the form a jump in its debt ratio.

That meant that the ECB's so-called PEPP programme would need to have the flexibility to be "expanded and extended for as long as needed and, if necessary, deviate from the capital key".