On April 4th, the European Union (EU) agreed on a €540 billion ($590 billion) rescue package (for a background on the EU, see my previous post). However, in light of much opposition particularly by the Netherlands and Germany, the Eurogroup decided against the launch of the so-called “Corona bonds”—joint (or mutualized) debt issued by the European Central Bank. The package includes two institutions:
In light of the COVID-19 crisis, the bailout fund makes €240bn available to guarantee spending by indebted countries that are part of the Eurozone. Each country will be able to request up to 2% of their GDP to finance “direct and indirect” costs related with the crisis.
The “COVID-19 package” includes €200bn in guarantees from the European Investment Bank and a European Commission for small businesses. In addition, 100 billion euro will be allocated to finance unemployment benefits. Part of these funds will be used support short-time working schemes (or kurzarbeit) in member states. Some have argued that the these aids will not be sufficient to tackle what some have called the worst crisis since the Great Depression. In the same manner, others continue emphasize how the limited powers of the EU in the health policy area has costed thousands of lives.
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In my first post, I discussed the Danish deal. As in the case of Denmark, other European countries are/will be launching their own rescue packages. Yet, Denmark is one of the 27 member states of the European Union (EU). This post provides basic information to understand the nature of EU involvement in this crisis. This supranational organization is unique in many ways. In economic matters, the EU somewhat resembles a federation (such as the United States) in that powers are allocated at different levels of government—supranational, national, sub-national, and local. For instance, the EU acts as a uniform international actor on trade matters (e.g., the EU has one vote at the World Trade Organization), but when it comes to fighting wars each EU country has its own military. How will the supranational level support EU member states during the Corona-Crisis? This press release from the EU Commission outlines the “Temporary Framework to enable Member States to use the full flexibility foreseen under State aid rules to support the economy in the context of the COVID-19 outbreak.” This framework seeks to fast-track member states' interventions by "relaxing the budgetary rules to enable them to do that." To understand the nature of EU’s Temporary Framework, it is important to clarify a few points: 1) The EU (mainly the European Commission) plays THE key role in regulating the European Single Market. What do I mean by this? Since the end of the 1980s, the European Union has passed a LOT of BINDING legislation to allow for the FREE movement of goods, people, services, and capital within the EU. A key element in this endeavor is the regulation of competition by the EU, namely how a member state can support its private and public (e.g., airlines, telecom) companies in a way that they are not given unfair advantages over other European companies. In this way, the EU sets the rules regarding the Single Market and, consequently, member states have to comply with these regulations. If they do not do so, these countries will be taken to Court (namely the European Court of Justice). 2) With the aforementioned Temporary Framework, therefore, the EU states “OK, these are special times. And, here are the guidelines on how states can support their companies in a way that member states comply with EU law.” [BTW: in cases in which there is a contradiction between domestic and supranational law, EU law always reigns—this is known as the “supremacy effect”]. Below, I include excerpts from a press release that outlines the Temporary Framework. 3) The EU budget is limited, as fiscal policy (defined as decisions about taxing and spending) remains in the hands of member states. 4) Monetary policy (defined as decisions of a central bank to manipulate the supply of money and credit), however, is in the hands of the supranational level (specifically the European Central Bank or ECB). Given these constrains: 5) As in the case of the US Fed, the ECB has also stepped in by launching a €750 billion ($821 billion) bond buying program. 6) While the EU was able to launch a few rescue packages during the Great Recession of the late 2000s, this course of action is very unlike in current times as all states will be hit by COVID-19. Yet, there is the possibility that the EU supports Italy and other Southern European countries. Now, given these constraints, which are ingrained in the architecture of the EU, the European Commission launched a set of guidelines for Member States, who will be mainly responsible for paying for these initiatives. These are: “(i) Direct grants, selective tax advantages and advance payments: Member States will be able to set up schemes to grant up to €800,000 to a company to address its urgent liquidity needs. (ii) State guarantees for loans taken by companies from banks: Member States will be able to provide State guarantees to ensure banks keep providing loans to the customers who need them. (iii) Subsidised public loans to companies: Member States will be able to grant loans with favourable interest rates to companies. These loans can help businesses cover immediate working capital and investment needs. (iv) Safeguards for banks that channel State aid to the real economy: Some Member States plan to build on banks' existing lending capacities, and use them as a channel for support to businesses – in particular to small and medium-sized companies. The Framework makes clear that such aid is considered as direct aid to the banks' customers, not to the banks themselves, and gives guidance on how to ensure minimal distortion of competition between banks. (v) Short-term export credit insurance: The Framework introduces additional flexibility on how to demonstrate that certain countries are not-marketable risks, thereby enabling short-term export credit insurance to be provided by the State where needed.” If interested, the reader should also refer to press release on coordinated responses to counter the economic impact of the Coronavirus. |
Author
Mariely Lopez-Santana is a Political Scientist and an Associate Prof. at the Schar School of Policy and Government at George Mason University. In the last two decades she has spent much time studying, teaching, and writing about employment policy. She is working on a book project on state intervention and municipal distress. Categories
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