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After Bailing Out Euro Area, Lagarde Tackles Merkel on Debt

Viktoria Dendrinou and Boris Groendahl

(Bloomberg) -- Just over a week after Christine Lagarde stepped in to shield European Union governments from a market rout, they rejected her appeal to show more solidarity in the face of the coronavirus pandemic.

The European Central Bank president reiterated her appeal for joint debt issuance on a video conference with EU leaders on Thursday, saying the bloc is facing a crisis of “epic” dimensions because of the viral outbreak, according to officials familiar with the discussion.

She suggested that all available instruments should be used, including credit lines from the currency bloc’s bailout fund, liquidity and guarantees from the European Investment Bank as well as joint debt issuance to share the burden and the risk of the required spending spree.

While German Chancellor Angela Merkel agreed with the bleak assessment of the situation, she resisted calls for mutualizing debt, warning against unrealistic expectations, according to the officials. Merkel’s tone was more categorical than before, one of the officials said, after nine EU leaders, including France’s Emmanuel Macron, backed the idea of jointly issued “coronabonds” in a letter ahead of the meeting. Dutch Prime Minister Mark Rutte backed the German chancellor’s stance on the joint instruments, the officials said.

Merkel’s intervention, which was delivered via an interpreter with just her photo on the screen, came amid dramatic pleas for more action from her counterparts. In an address officials described as emotional, Italian Prime Minister Giuseppe Conte said his whole country was suffering, while Macron warned that the political reaction after this crisis could kill the European project, two of the officials said.

According to two of the officials, during the discussion, Conte said what was on the table was not enough and that the measures leaders were debating were made for asymmetric shocks and Italy does not need them -- a nod to the argument that the outbreak has dealt a blow to all economies.

Instead, he supported an idea by Spanish Prime Minister Pedro Sanchez to task the EU’s five presidents -- the leaders of the ECB, the European Commission, the European Parliament, the European Council and the Eurogroup -- with drafting a joint proposal on using all available fiscal instruments in 10 days.

Divisions over risk sharing, which have been holding back deeper European integration for years, came to the fore again after the spread of the coronavirus led the continent’s economies into a nosedive. When sovereign bond yields spiked amid doubts by investors on whether indebted countries can afford the spending required to stem the fallout, the ECB announced a massive bond purchase program that brought back down borrowing costs across the bloc.

The ECB’s intervention has so far let the decision-making paralysis among EU governments go unpunished. In addition to joint debt issuance, leaders also disagree over the terms and conditions attached to any borrowing that member states may resort to from the euro area’s bailout fund.

During the leaders’ discussion Greek Prime Minister Kyriakos Mitsotakis, who co-signed the letter calling for coronabonds, cautioned that if the bloc didn’t react, it could push the ECB toward an even larger program that would risk financial instability.

Countries such as Italy, which has been hit the hardest by the virus, argue that the economic shock isn’t of their own doing, so the typical strings attached to any lending from the European Stability Mechanism, if it’s ever needed, shouldn’t apply. Other governments, such as Austria oppose any no-questions asked lending.

Even though there is a broad consensus among euro-area finance ministers on the need to use the ESM credit lines as a backstop for governments, the details on how and under what terms should the funds be disbursed are still to be worked out.

In a sign of the divisions that have continued to plague the bloc’s governments over how best to respond to the economic fallout of the deadly viral outbreak, diplomats working to draft a joint statement failed to settle their differences over the ESM tool and removed the reference altogether ahead of the leaders’ call.

(Adds Italian, French reactions from the fifth paragraph)

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