Divided Europe agrees on $590 billion in coronavirus funds—but leaves tough choices for later

European Union finance ministers agreed on a 540 billion-euro ($590 billion) package of measures to combat the economic fallout of the coronavirus pandemic, papering over differences that have thrown into question the EU’s future integrity.

In an emergency teleconference on Thursday, the bloc’s finance chiefs approved a plan to stave off what’s expected to be a recession of unprecedented size. The deal will lay to rest — at least for now — concerns that the EU was incapable of uniting behind a common strategy when it was most urgently needed.

In a sign of relief, ministers broke out in applause once the agreement was struck. However, it falls short of what those countries hardest hit by the virus — Spain and Italy — had been demanding, and notably omitted any reference to debt sharing. It’s now up to EU leaders to take up the debate and reopen the accord or approve it as it stands.

“Today we agreed on three safety nets and a plan for the recovery to ensure we grow together and not apart once the crisis is behind us,” Mario Centeno, the Portuguese finance minister who runs the so-called Eurogroup meetings, told reporters.

The common response includes a joint employment insurance fund worth 100 billion euros, a European Investment Bank instrument intended to supply 200 billion euros of liquidity to companies, as well as credit lines of as much as 240 billion euros from the European Stability Mechanism — the euro area’s bailout fund — to backstop states as they go on a spending spree to help economies back on their feet.

The ministers also agreed to work on a temporary fund that would help kick-start the recovery and support the hardest-hit countries while leaving open how it would be financed. French Finance Minister Bruno Le Maire said the fund could be decided on in the next six months and may total 500 billion euros.

All of it needs approval by government leaders as early as next week, and tensions persist.

Vulnerable Union

Disagreements were laid bare earlier this week when finance ministers failed to agree on a joint response after 16 hours of bitter negotiations.

On Thursday, the meeting was delayed by nearly five hours while key countries including the Netherlands, Italy, France, Germany and Spain negotiated a compromise that would ultimately be uncomfortable to most, yet acceptable to all. Once the meeting started, it took just 30 minutes to declare success.

The agreement on the recovery fund was a victory for countries including France, Spain and Italy, which have been pushing for it to be financed through joint debt issuance. Yet the text skirted the question of common debt and only mentioned “innovative financial instruments” — a reference that even countries like Germany, that are loath to agree to further risk sharing — could live with.

“It’s good that there is a deal, but the size of the program is too small,” said Guntram Wolff, director of the Bruegel think tank in Brussels. Finance ministers accept that the European Central Bank will have to do the heavy lifting, and “as long as there is consensus on that, the outcome is OK,” he said. “The Eurogroup was not ready to create on a large scale European debt.”

Europe Overwhelmed

Covid-19 has overwhelmed Europe, with the continent suffering more than 65% of the worldwide deaths attributable to the virus. The scale of the damage shines a spotlight on the vulnerabilities of a union whose sense of common purpose has been tested over the past decade by the Greek debt crisis, an influx of refugees and then Brexit.

But the coronavirus outbreak — in the words of German Chancellor Angela Merkel, a veteran of many geopolitical fights — poses the biggest threat to the EU since World War II. Italian Prime Minister Giuseppe Conte warned this week that countries will have to write off Europe and “everyone will do their own thing” without agreement on shared debt to finance economic recovery.

Italian Finance Minister Roberto Gualtieri told his colleagues that while he backed the agreement, Conte would raise the issue of joint debt at the next meeting of EU leaders. And he elaborated in an interview with Rai 1 on Friday that the total recovery package should total around 1.5 trillion euros.

Italy, Spain and France are among about 10 countries pushing for what has been dubbed coronabonds to help share the burden of this crisis. They have run into resistance from fiscally hawkish northern EU countries.

“We are and will remain opposed to #Eurobonds,” Dutch Finance Minister Wopke Hoekstra said on Twitter after the meeting. “We think this concept will not help Europe or the Netherlands in the long-term.”

The accord’s wording on the use of credit lines from the bailout fund left a lot to be desired for all camps. The conditions attached to these funds were the main sticking point earlier this week, with the Netherlands lobbying for a requirement that ensures countries return to fiscal health once the crisis is over.

In the end, the Dutch got a slightly stricter commitment that countries would strengthen their “economic and financial fundamentals” once the crisis was over. Meanwhile, the lines would be able to finance “direct and indirect healthcare, cure and prevention related costs,” a likely narrower scope.

While the virus’s reach has been indiscriminately global, most countries have acted alone and in their own interests. Europe’s richer but more-frugal north is pitted against Italy and Spain, the worst-affected countries, in a climate of mistrust and simmering resentment.

As with many an EU deal, everyone claimed a victory and some of the thornier details were left to be ironed out among the leaders.

Some finance chiefs will have trouble selling the deal back home — especially in Italy, which doesn’t want to be seen as ceding to northern Europe at a time of national crisis when the ESM already is a target for euroskeptic politicians.

Italian opposition leader Matteo Salvini said he would seek a confidence vote against Gualtieri for agreeing to Thursday’s deal. Accepting a deal involving the bailout fund would be “illegal and senseless,” putting “the savings, the property and the future of Italians at risk,” Salvini said this week.

“We need a win at the European Council,” Gualtieri said on Friday, adding that there would be a “battle” over joint debt at the upcoming meeting of EU leaders. “I am confident that the Italian position will prevail and we are close to pushing the more reluctant countries on the issue of bonds.”

More must-read international coverage from Fortune:

—After coronavirus, expect to see smaller airlines
—Why “inside the tent” assets like corporate debt may be poised to outperform
—Hong Kong airport is the first to test all arrivals for coronavirus
World War II offers lessons—and warnings—for the coronavirus fight
—Listen to Leadership Next, a Fortune podcast examining the evolving role of CEO
—WATCH: The global crisis in recycling

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