(Bloomberg) -- European Union divisions over how to respond to the economic fallout of a deadly viral outbreak will come to the fore on Thursday, as the bloc’s leaders seek agreement over a joint communique outlining their strategy.
A draft of the document pledges protection for European companies from foreign takeovers, and gives the green light for the creation of credit lines to help keep borrowing costs low while governments go on a spending spree to cushion the impact of the pandemic. But efforts to agree on the exact wording ahead of a video conference on Thursday afternoon failed, with diplomats representing member states unable to settle their differences ahead of the meeting.
A group of member states including France, Italy and Spain wants the communique to hint that much more radical steps to tackle the economic fallout are in the pipeline. Among other things, the group has demanded joint debt issuance to share the burden of the spending needed to battle the damage to the economies from the outbreak. Hawkish Northern governments resist such calls, while some insist that conditions are attached to any borrowing from the euro area’s bailout fund.
Here’s an overview of what leaders are planning to decide, based on the latest communique circulated among diplomats a couple of hours before the summit and seen by Bloomberg. The draft hasn’t garnered the unanimous support needed, while some officials have cautioned that leaders may not even agree on a statement.
Leaders are due to endorse plans to set up credit lines between euro-area governments and the currency bloc’s bailout fund. They’ll invite finance ministers to sort out the details as soon as possible, amid disagreements over the terms and conditions.
Credit lines from the European Stability Mechanism are a necessary -- though not sufficient -- condition for the activation of the European Central Bank’s unlimited bond purchases program. Pressure to trigger this ultimate line of defense to keep borrowing costs low has eased for governments, after the ECB launched a massive asset-purchase program specifically targeted on the virus fallout. Crucially, the program has no issue limits, which constrained government bond-buying to a third of each of its member state’s debt.
In the latest draft, leaders are meant to say they “support the decisive action taken by the European Central Bank to ensure supportive financing conditions in all euro area countries.” Still a group of leaders wants more, including joint debt issuance in the form of coronabonds. Germany, the Netherlands and Austria are unlikely to agree to such risk sharing instruments at this stage.
European leaders will signal sensitivity to the possibility of hostile foreign takeovers of EU-based companies weakened by the impact of the virus. The latest draft of the summit statement urges EU governments “to take all necessary measures to protect strategic assets and technology from foreign investments that could threaten legitimate public policy objectives.” A year ago, the bloc already approved the first EU-wide rules to prevent foreign direct investments from threatening national security.
The European Commission issued special guidelines on Wednesday to EU capitals on enacting new bloc-wide rules meant to prevent foreign direct investments from threatening national security. Adding to signs of increasing alarm, Italy said it may broaden defenses against hostile takeovers.
Bending the Rules
The communique affirms the commitment of the bloc to scrap its entire rulebook in an effort to contain the fallout from the crisis. Already, the EU has ditched its rules committing member states to strict fiscal discipline, eased restrictions on cash injections and state aid to companies, and it’s even considering suspending accounting rules for banks.
The statement also includes an implicit promise to subsidize European vaccine producers. EU leaders will pledge to support European companies working on vaccines, in an apparent response to reports that the U.S. was interested in buying German biotech firm CureVac AG.
The latest draft statement explicitly mentions the Green Deal in the context of an exit strategy from the crisis. The reference to the landmark EU policy, which didn’t exist in the previous draft of the communique, also seen by Bloomberg, reflects a growing concern in the bloc that indiscriminate assistance to companies may hinder the bloc’s strategy to eliminate its net carbon emissions and could result into public funding of unsustainable business models.
“We should however start to prepare the measures necessary to get back to a normal functioning of our societies and economies and to sustainable growth, integrating inter alia the green transition,” leaders will say.
Leaders will also address what is to be learned from the current health scare: “The time has come to put into place a more ambitious and wide-ranging crisis management system within the EU.”
They will highlight that their systems have been built for efficiency under normal conditions, thus limiting their “resilience” in crises such as the coronavirus. Health care systems in some nations have been overwhelmed by the sheer number of pneumonia cases caused by the coronavirus.
After the crisis is over, expect the commission -- the EU’s executive arm -- to come up with proposals for making sure backups and contingency plans are in place in areas ranging from health care to supply chains.
European Investment Bank
One generally unsung EU institution tends to grab a sizable share of the spotlight during tricky policy moments for Europe and the current pandemic is no exception: the European Investment Bank. The Luxembourg-based EIB, the EU’s lending arm, is being deployed to offer bank guarantees for liquidity and investments in European companies. EU leaders plan to ask their finance chiefs to “scale up” the EIB’s “coronavirus response overall,” according to the draft of the summit statement.
European leaders will vow to “resolutely counter disinformation with transparent, timely and fact-based communication on what we are doing” to combat the virus outbreak, according to the draft. An internal EU memo from March detailed how a Russian campaign had spread disinformation about the coronavirus. The intention was to exacerbate the crisis by spreading distrust in national health-care systems and intensifying fear and confusion. The bloc’s executive body and the EU’s foreign affairs chief will also be involved in the effort to “reinforce the resilience of our societies,” the leaders will say.
Leaders are set to endorse the start of accession negotiations with Albania and North Macedonia, in a step that may help anchor the fragile Western Balkans region to the West and repair the political damage caused by France’s veto in October.
Finally, leaders will reiterate their solidarity with Greece in its dispute with Turkey over migration flows, in a blunt statement that seeks to balance Greek demands for support with EU’s eagerness to appease Ankara so that it continues to abide by a 2016 deal stemming refugee flows to Europe.
(Updates throughout with divisions over wording of a joint statement)
For more articles like this, please visit us at bloomberg.com
Subscribe now to stay ahead with the most trusted business news source.
©2020 Bloomberg L.P.