Via Financial Times

The EU’s raging debate over whether to pool its fiscal firepower to fight the coronavirus crisis reaches a crunch point on Thursday when leaders dial in for their latest e-summit (from 15.00 CET).

The virtual gathering is set to expose numerous faultlines, as leaders gear up for a heated debate on how to steer the European Commission’s attempts to design a Recovery Fund worth at least €1tn to pay for the post-lockdown rebound.

To help you get through it all (the summit shaping up to be a marathon all-nighter), the FT Brussels Briefing has compiled a cut-out-and-keep jargon-buster to decode the acronyms and buzzwords on leaders’ lips on Thursday. 

Multiannual financial framework (MFF) 

Dubbed rather oddly the “mother ship” of the recovery by Ursula von der Leyen, commission president, the multiannual financial framework (MFF) is the EU’s seven-year budget. The current €1tn MFF ends in December, and the commission is suggesting a total rewrite of the upcoming one starting in 2021 to make it the engine of the economic reconstruction.

This would involve granting the commission expanded scope to raise debt in the markets to build up a recovery fund. Not everyone is keen on this power grab, however. In particular, southern states and France would prefer the recovery fund to hover outside the MFF, partly because this could allow them to drive through a deal more quickly. The problem with funding the recovery from within the MFF is that the budget talks are badly stalled. 

Recovery Fund

This is the heart of the debate: does Europe need a big new common pot of money to fuel the recovery? There are multiple plans in circulation. Spain, for example, has tabled a proposal that would involve €1.5tn of grants to alleviate the corona-crunch. France has a proposal worth a trillion euros.

The commission is floating the idea of a “recovery instrument” worth well in excess of a trillion, as part of its MFF re-boot.

The idea behind the recovery fund is to put some collective budgetary firepower into the rebound, helping in particular member states with creaking public finances. Absent outside help, the fear is that many of those in the south and east of the bloc will lack sufficient capacity to invest, leaving their economies floundering as traditional northern European powerhouses get back on their feet. 

Budget headroom

The commission’s draft plans, which are still being discussed, require it to conjure up further financial firepower without member states being forced to pony up hundreds of billions of extra euros. The proposals require the commission to borrow heavily on the financial markets — something it has the power to do, but normally using only relatively modest sums. 

The gap between actual EU spending and the maximum ceiling the union can raise from member states is an important factor for credit rating agencies. If that ceiling can be boosted, it will enhance the budget “headroom” at the commission’s disposal. This would expand the commission’s ability to raise funding at low rates on the capital markets — money that in turn could be used to support member states’ efforts to revive investment.

Coronabonds

This was once the dream of many southern European states — a massive sale of joint bonds backed by EU member states that would seed the recovery. But their hopes have been steadily fading, as northern European states reiterate suspicions of schemes that appear to lead to mutualised debt issuance and northern taxpayers underwriting fiscally weaker member states.

So discussion at the summit on Thursday will more likely be on whether to leave the door open for the commission to use its existing debt-issuing powers on a significantly expanded scale. One key question stemming from that is whether the cash raised by the commission would all be lent onward to member states, or whether some of it can instead be handed out as grants — a notion that triggers displeasure in the north.

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Consols/perpetual debt

A favourite of wartime historians. Perpetual bonds — also known as consols — are debt instruments with no fixed date on paying back the principal amount that is borrowed. Consols have been a tried and tested way for governments to fund war efforts, with the British making the best use of them to finance 18th century Stuart escapades and two world wars. 

Issuing EU consols for the coronavirus effort was first touted by Guy Verhofstadt and Luis Garicano earlier this month. It has since been taken up by the Spanish government and George Soros.

The appeal is clear (particularly for those who compare the pandemic to a war effort): perpetual debt would alleviate part of the repayment burden on Europe’s southern borrowers and means they only need to worry about debt servicing their costs. But that’s also the reason it has been met with a firm “no” by northern governments who balk at the idea of Brussels issuing annuity type loans with their money. 

French economy minister Bruno Le Maire has pushed for an ‘SPV’ recovery fund © AFP via Getty Images

Special Purpose Vehicle (SPV) 

The beauty of this one is that it can mean whatever you want. France is the main proponent of an SPV as the best way to set up a recovery fund that is free of the legal and political constraints that come with negotiating a tool that is part of the EU budget.

Paris wants an SPV fund around €1tn that will dish out grants. But the chances of pulling it off are virtually zero. The commission and most member states are devoting their political energies into coming up with a recovery fund that sits firmly inside the next EU budget.

Cohesion funds

Lucrative catch-up development cash that is dished out to Europe’s poorest regions from the EU’s budget. Poland and Hungary have traditionally been the biggest beneficiary of EU cohesion money and that is unlikely to change any time soon.

Still, Brussels wants to rejig some rules around how to dish out the cash in the first two years of the next budget (2021-22) so it can be funnelled to economies bearing the brunt of the virus. Given the sensitivities involved — particularly for eastern member states — a senior EU diplomat stresses that there will be no big revolution in the cohesion pot. “Rumours about cohesion shifting from east to south are a phantasm,” said the diplomat. 

European Stability Mechanism (ESM)

This is the eurozone’s bailout fund that was set up at the height of its last major crisis in 2012. Finance ministers spent the early part of the crisis trying to find ways to harness the ESM and its emergency credit lines for stricken economies.

After a tussle between the Netherlands and Italy, ministers agreed that countries could tap aid worth as much as 2 per cent of their GDP from the ESM to spend on direct and indirect healthcare costs. Crucially, this money would come without conditions to carry out future reforms — something Italy had demanded. 

Despite the compromise, the crisis may well pass without any country ever accessing the ESM’s emergency help. The issue remains incredibly divisive in Italy where Eurosceptic opposition led by Matteo Salvini has dubbed the aid an “attack” on national sovereignty.

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Pandemic emergency purchase programme (PEPP)

Arguably the most important acronym of all and the one that has bought Europe’s leaders the time to keep squabbling over Zoom.

The ECB stunned markets in mid-March with a shock €750bn bond-buying spree, known as PEPP. It means the central bank is hoovering up vast amounts of eurozone sovereign bonds and is no longer limited by previous caps on how much debt of one country it could have on its balance sheet.

Declared as the ECB’s “no limits” moment, the intervention had the immediate effect of calming eurozone bond spreads — but there have been worrying signs in recent days that even PEPP might not be enough for Italy.

Your coronavirus reads

  • The Netherlands’ former EU commissioner Frits Bolkestein thinks “disastrous” eurobonds would be a “nail in the coffin” of the EU. (Volkskrant)

  • Guntram Wolff at Bruegel argues that any form of common EU debt will always be a liability for governments but that oversight on how the money is spent should be done by Europe’s institutions and not its member states.

  • The New York Time’s Steven Erlanger on how the EU is “helpless” and “even complicit” in Poland and Hungary’s exploitation of the pandemic to crack down on political opposition 

Chart du jour: Trump’s oil rollercoaster 

Line chart of Price of active WTI futures contract per barrel in $ showing Oil goes on wild ride over storage fears

International oil prices have rebounded from record lows after Donald Trump stoked fresh tension in the Middle East by threatening to “shoot down” Iranian gunboats that “harass” US vessels at sea. Chart and story via the FT.

Pandemic news round-up

Italian finance minister Roberto Gualtieri © REUTERS

What does Italy want?
The Italian government’s stance on coronabonds, the EU recovery fund and ESM have been sources of much speculation in Brussels in recent weeks. To clarify the confusion, the Brussels Briefing spoke to Roberto Gualtieri, Rome’s finance minister, on what his government wants out of Thursday’s summit.

To start, Mr Gualtieri rowed back from prime minister Giuseppe Conte’s insistence on mutualised debt in this weekend interview, saying instead that his government was not “attached” to terms like coronabonds. Ahead of the summit, Rome is backing a Spanish push for a recovery fund where the commission raises €1.5tn in perpetual debt to offer grants. If consols do not get support from other member states, Mr Gualtieri said the recovery instrument should issue very long dated debt instead. 

The main point of the fund should be to “spread the cost of the recovery over time, through common borrowing”, said Mr Gualtieri, adding:

“A fund based on perpetual bonds would be the optimal solution. An alternative, is a fund that borrows with the longest possible maturity. There is ample demand in the markets for such type of instruments. This would also help financial stability and foster the Capital Markets Union.”

Expectations of a grand bargain emerging at Thursday’s summit are low and the former MEP said he did not expect “all the details [of the Recovery Instrument] to be settled” on Thursday. But he hinted that Rome is ready to compromise and drop its singular focus on coronabonds:

“We are open to different solutions and we have our ideas on how to address these technicalities. But four elements are key for us: sufficient size, quick implementation, fair distribution, and a ‘borrow to spend’, and not — or not only — a ‘borrow to lend’ approach.”

UK government dominated by PPE
The UK’s spat with the EU over participation in a procurement programme has escalated another notch after Brussels insisted the government had “ample time” to take part in the buying programme. Jim Brunsden has more. In other grim news for the government, the FT finds that actual coronavirus related deaths are likely twice as high as official figures at around 41,000.

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Anti-autarky 
Brussels trade chief Phil Hogan tells the FT’s Trade Secrets newsletter that Europe should not aim to repatriate its medic supply chains to the continent in response to French calls for the EU to become “self-sufficient” in the area of medical equipment:

“Strategic autonomy does not mean that we should aim for self sufficiency. Given the complexity of supply chains to the European Union, this would be an unattainable goal . . . we have to look at how to build resilience based on how we can diversify, not be totally reliant on one geographical entity for supplies of everything.”

Polexit 
Poland is edging closer to being expelled from an important European judicial body over controversial reforms that have undermined judicial independence, writes James Shotter in Warsaw. 

The head of the European Network of Councils for the Judiciary, Kees Sterk, on Wednesday wrote to Poland’s National Judicial Council — which is responsible for appointing Polish judges — warning that the ENCJ was considering holding a vote on expelling the KRS because it was no longer independent of the Polish executive.

The KRS has been suspended from the ENCJ since September 2018, following a series of reforms by the conservative nationalist Law and Justice, which give politicians the power to appoint most of the KRS’s members. The KRS has until May 22 to respond to the ENCJ’s concerns.

The race for a vaccine 
The EU has backed an effort to use supercomputers to vet drug candidates for a coronavirus vaccine, write Javier Espinoza and Michael Peel.

The initiative, in collaboration with pharma giant Sanofi, is part of Europe’s push to deploy electronic processing power in the urgent quest for a vaccine. The French drugmaker will work with Greenpharma and a coalition of 33 partners, including biological and biochemical institutes, to add to a database of thousands of existing drugs aimed at discovering which molecules could combat the virus. 

The consortium, which has €3m in EU emergency funds, has already tested 6,000 molecules and is evaluating 40 of them for pre-clinical trials. 

Italian drugmaker Dompé is leading the EU project and has made freely available its library of small molecules to assess the efficacy of all drugs to fight the virus.

A separate scheme known as Jedi and supported by the Axa Research Fund and Merck, the pharmaceuticals business, aims to model a billion or more molecules in search of those potentially active against the new coronavirus. Jedi is overseen by a scientific committee that includes Sir Peter Ratcliffe, co-winner of last year’s Nobel laureate for medicine. 

News in brief
The ECB has opened the door to accepting junk-rated bonds as collateral for loans from banks, a significant move designed to relax its credit rules during the pandemic. In the US, secretary of state Mike Pompeo has accused China of destroying early Covid-19 samples to cover up the origins of the virus. Le Soir have got hold of a leaked Belgian government report which suggests the country’s lockdown could ease from May 3. 

Coming up on Thursday 
EU leaders start their teleconference summit on 15.00. 

mehreen.khan@ft.com; @mehreenkhn
sam.fleming@ft.com; @sam1fleming