Europe unable to reach deal on new coronavirus aid as long-held tensions resurface

BRUSSELS, BELGIUM – MAY 24: French Minister of the Economy Bruno Le Maire (L) is talking with the Dutch Minister of Finance, Wopke Hoekstra (R) prior an Eurogroup Ministers meeting in the Europa, the European Union Council headquarter, on May 24, 2018 in Brussels, Belgium. 

Thierry Monasse | Getty Images News | Getty Images

Euro zone finance ministers are not expected to agree on additional funding to mitigate the economic impact of the coronavirus when they meet Tuesday evening, two sources told CNBC.

The 19 members of the euro zone are some of the hardest hit nations by the virus that emerged in China in late 2019.

Italy, France, Germany, Spain and Belgium are some of the euro countries in lockdown due to the outbreak. This has meant that most people are working from home and that non-essential retail and social activities are prohibited — raising new economic challenges. 

“I very much doubt that anything will be decided tonight,” an EU official, who did not want to be named due to the sensitivity of the talks, told CNBC Tuesday. 

A second EU official, who also did not want to be named due to being close to the talks, told CNBC that “a final deal would never happen today.”

Euro zone countries have individually announced fiscal stimulus to shield their economies from the virus’ impact. Jointly, the 27 European countries agreed to have a 37 billion-euro ($40 billion) investment initiative to help businesses in this crisis.

However, there was some pressure on the euro zone, where 19 of the 27 EU countries share the same currency, to go further.

“While pressure had been building on euro zone governments to agree to a co-ordinated and sizeable fiscal expansion, Lagarde’s intervention has arrested some of this momentum,” analysts at the research firm Eurasia Group, said in an email Monday. 

The European Central Bank (ECB), chaired by Christine Lagarde, surprised the markets with a $820 billion coronavirus package last week. The decision boosts the lending capacities of every country in the euro zone, which should help them dealing with the economic impact from the virus.

The coronavirus outbreak is putting renewed pressure on the euro area, given a sharp hit to growth and a large deterioration in the fiscal outlook

Goldman Sachs

One of the potential steps that finance ministers are looking at is giving its crisis fund the chance to lend more – a so-called enhanced conditional credit line. 

This would be done by the European Stability Mechanism (ESM), a euro area fund established at the height of the sovereign debt crisis to help countries at risk of financial collapse. The ESM could lend money with favorable short-term conditions to all the coronavirus-hit economies in the euro area.

In return, countries that borrow that money would likely be subject to some conditionality, such as achieving a certain budget surplus in the future.

However, the traditional north-south divide is blocking any speedy progress on new funding.

VENICE, ITALY – MARCH 06: Two gondoliers play with a cat on March 06, 2020 in Venice, Italy. Venice is deserted because of COVID-19.

Stefano Mazzola/Awakening

Northern euro countries, which tend to be more fiscally conservative, are skeptical about rushing to additional measures. Overall, they believe that with the recent ECB steps and with the individual country announcements on fiscal stimulus, there is perhaps no need to do more at the euro zone level.

“Quite a few member states don’t know why these measures are a problem at the moment and therefore necessary,” the first EU official said.

On the other hand, southern European nations, such as Italy and Spain, are of the opinion that the euro area needs its own ‘Marshall Plan’ to mitigate the impact from the virus. 

“The coronavirus outbreak is putting renewed pressure on the euro area, given a sharp hit to growth and a large deterioration in the fiscal outlook,” analysts at Goldman Sachs said Monday.

However, they added that finance ministers could announce an agreement in principle for a new credit line, with details to be developed in the coming weeks. 

“We now see a good chance of additional reform of the ESM to provide credit lines with less stringent conditionality. Euro area finance ministers could, in principle, agree to set this reform in motion at their meeting (Tuesday), although implementation will take some time,” Goldman Sachs said in a note.

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