Europe moves closer to using crisis fund to help countries hit by the coronavirus pandemic

Key Points
  • The economic and political pressure has resurfaced old divisions among European nations.
  • However, three Brussels-based officials, who didn't want to be named due to the sensitivity of the issue, told CNBC that member states are moving toward an agreement.
French Economy and Finance Minister Bruno Le Maire (R) and Portuguese Finance Minister and Eurogroup chief Mario Centeno speak as they attend a Eurogroup meeting at the EU headquarters in Brussels on February 17, 2020.

There is growing optimism that euro zone finance ministers will approve new funding to the countries wrestling with the coronavirus pandemic, but division over so-called "corona bonds" is likely to remain.

European economies are at a standstill after many governments implemented national lockdowns to reduce the number of infections from COVID-19, the virus that emerged in China in late 2019. People have been stuck at home for almost a month, meaning all non-essential businesses have closed their doors across most European nations.

The economic and political pressure has resurfaced old divisions among European nations. However, three Brussels-based officials, who didn't want to be named due to the sensitivity of the issue, told CNBC that member states are now moving toward an agreement.

"We are almost there," an EU official from one of the largest EU economies, told CNBC Monday over the phone.

A second official, from a northern European country, said "we are hoping for an agreement."

A third person close to the talks said: "We are not there yet," but "there is a convergence (in opinion)."

Euro zone finance ministers — from those countries that share the single currency — are due to have a video call Tuesday, after a meeting between the 27 EU heads of state failed to deliver any meaningful conclusion about two weeks ago.

The three officials suggested ministers are likely to approve a credit line through the region's crisis fund — the European Stability Mechanism (ESM). The total credit line would be 2% of the euro area GDP (gross domestic product), roughly 240 billion euros ($258.82 billion) and be available to every nation in the 19-member euro area region.

There would be in return "very, very light conditionality," the second official said, adding that there would be "no Troika," referring to the three institutions that monitored how bailed-out nations were performing in the wake of the sovereign debt crisis of 2011.

EU's coronavirus credit line could reach 240 billion euros

The idea of making loans available through the ESM has provoked some criticism in Italy, where the government does not want tough deficit and debt criteria attached to any loans. Rome believes the pandemic is hitting every EU nation and therefore no country should be punished with strict measures in exchange for financial support.

"The funds must not come with any unnecessary conditions attached, as that would be tantamount to a rerun of the austerity policy that followed the financial crisis and would lead to unequal treatment between individual member states," the German ministers of finance and European affairs said in an opinion article on Monday.

"The ESM already permits euro zone countries to borrow capital together on the same favourable conditions. For Italy, this would mean a fresh injection of 39 billion euros, and for Spain, 28 billion euros. They should be allowed to use this money for all necessary expenditures to fight the coronavirus," the ministers also said.

Coronabonds would demonstrate solidarity among EU members: former ECB president

Additionally, ministers are expected to approve further help through a pan-European guarantee fund that could ultimately reach 200 billion euros, as well as greenlight a European Commission proposal to raise 100 billion euros in financial markets to mitigate unemployment levels.

However, corona bonds — which describe the idea of issuing joint European debt — remain the big elephant in the room.

Nine EU countries, including Italy, Spain and France, have asked their counterparts to fund some of the costs of the coronavirus crisis through joint debt issuance. However, this idea has sparked fierce opposition in the Netherlands and Germany, where the respective governments are reluctant to take such action.

"The debate is still ongoing about whether we should go further," the first official said.

Speaking to CNBC Tuesday, former European Central Bank President Jean-Claude Trichet said the north-south divide is "counterproductive" and "useless.

Since the pandemic began spreading across Europe in late February, the EU has also scrapped its fiscal rules to allow countries to spend more during this crisis. It has set up a 37 billion euro investment fund to support businesses all over Europe, and relaxed state aid rules.

However, the biggest financial help has been from the European Central Bank. The institution is buying 750 billion euros in European bonds until the end of the year  — an announcement that has lowered the costs for European governments in financial markets.