Spain proposes a €1.5 trillion coronavirus recovery fund financed through perpetual EU debt

The Spanish government is clear that the major post-coronavirus game will be played out in Europe. The chances for economies that have been so badly affected by the pandemic to get back on track, such as those of Spain and Italy, will depend on there being a kind of “Marshall Plan” in the EU over the next few years, they say from La Moncloa prime ministerial palace.

As such, Prime Minister Pedro Sánchez has opted to play hard at the upcoming European Union summit on Thursday, and will adopt an ambitious position, which is summed up in a non-paper, and proposes a recovery fund of around €1.5 trillion financed through perpetual EU debt, and that will be allocated via grants – and not debt – among the countries most affected by the crisis.

Spain’s plan would avoid the massive indebtedness of the southern countries and would help their economies recover

Spain is opting to seek greater protagonism at the next summit, with a very clear position in line with that being defended by other southern European countries, such as France and Italy, both of which have been greatly affected by the crisis. These latter two countries, however, are suggesting different solutions and above all are thinking along the lines of an intermediary solution that could be negotiated with Germany.

German chancellor Angela Merkel has already insisted that she will not accept any kind of “coronabonds,” a suggestion that has been pushed in the past by southern EU countries, including Spain, in order to share the debt burden of economic reconstruction once the pandemic is under control.

As a result, Spain has come up with this latest plan, by suggesting a recovery fund linked to the EU budget, an idea that is similar to that of France and that Germany may accept because it would not imply legal modifications that involve complex voting in the German parliament and possible appeals at the latter country’s Constitutional Court.

Spain’s proposal – which is already circulating in Brussels – is not focused on the immediate crisis, which each country is dealing with using its own resources, and are taking on debt for now at reasonable costs thanks to the European Central Bank (ECB). But instead, it is suggesting a recovery fund that, at €1.5 trillion, is practically the size of the Italian economy, and would inject money directly into the most-affected economies.

Spain’s plan would avoid the massive indebtedness of the southern countries and would help their economies recover. It would not be a scheme to lend money to the affected countries, as happened with the bailouts during the Great Recession, but rather would make direct grants to member states “based on a national allocation key related to the impact of the Covid-19 crisis on the basis of clear and transparent indicators, such as percentage of population affected, drop of GDP, increase in unemployment levels, etc.,” the document explains.

Until now, all of the measures planned by the Eurogroup have been based on loans that would have to be repaid by the member states. These include €500 million of bailout funds from the European Stability Mechanism (ESM), guarantees from the European Investment Bank and funds for temporary suspension of employment schemes. The aim of such measures is to provide liquidity in the early stages of the crisis, but without any real impact on economic recovery, something that is considered to be essential. The recovery fund proposed by Spain is a completely different concept.

Spain is the country that so far has most clearly set out the numbers in a non-paper. The government believes that the level of ambition needs to be raised or the European response will not have a real effect on the economy. The financial firepower that will be made available is fundamental to this: the minimum size of the fund, the paper states, “should be robust in order to have a macroeconomic impact and offset the negative impact of the current crisis. Most experts estimate it at 1% of EU GDP (€1 to €1.5 trillion).” The financing should be ready by January 1, the document continues. And Spain also suggests that operational work for the “full implementation of the three instruments” that constitute the “triple safety net of around €500 billion for states, companies and workers” should be completed by June 1, 2020.

The proposal seeks to mend the gulf between countries such as France and Italy, which are pushing for a joint budgetary response, and the reticence of northern countries such as Germany and the Netherlands

The recovery fund “should be financed through perpetual EU debt, backed by existing legal mechanisms to fund the EU budget,” the document states, in one of its more ambitious objectives. Perpetual debt implies that only interest would be paid, and that it would be taken on in solidarity. This debt would be “backed by existing legal mechanisms to fund the EU Budget underpinning the triple A rating of the EU institutions,” the paper states. “The ECB should continue to play a key role to ensure financial stability through liquidity and other measures,” the document continues.

The non-paper, which runs to barely three pages, seeks an understanding ahead of a European summit that will try to mend the huge gulf between the demands of countries such as France and Italy, which are pushing for a joint budgetary response, and the reticence of northern countries such as Germany and the Netherlands to commit to a joint budgetary response. The new fund, the document suggests, “could be anchored within the umbrella of the Multiannual Financial Framework, below the own resources ceiling but above the expenditure ceiling,” a deliberately open formula.

This link with the EU budgetary framework for 2021-2027 seeks to build bridges with the government of Angela Merkel, which has already made clear that the response to the Covid-19 crisis should depend on the budget in the medium term and the ESM for more urgent liquidity.

Spain also warns against the risk of the current national responses: the relaxation of the rules approved by the European Commission to respond to the Covid-19 crisis favors countries with a greater fiscal margin, such as Germany and the Netherlands. “Finally, whereas increased flexibility for national responses is needed and welcome, it is key to avoid that this leads to a more unequal EU and a weakening of the internal market,” the document reads.

With this position, Spain is playing its European trump card. The first responses will arrive on Thursday. But this battle has only just begun.

English version by Simon Hunter.