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Europe’s Door to Joint Debt Cracks Open as Germany Softens

John Follain, Alessandro Speciale and Arne Delfs

(Bloomberg) -- Angela Merkel signaled she may be open to joint European Union debt issuance to help offset the impact of the coronavirus, an apparent softening of entrenched German opposition that could transform the finances of the 27-nation bloc.

The unexpected opening from the leader of Europe’s dominant economy came after the chancellor and her EU counterparts agreed by video conference to restrict most travel into the continent in an unprecedented move aimed at slowing down the spread of the virus and mitigating its effects.

European governments continued to mobilize resources to try to shield companies, preserve jobs and reassure investors as citizens are ordered to accept draconian curbs on daily life. With central banks almost out of ammunition, leaders are scratching their heads for ways to finance the sudden burst of spending without reviving the market turbulence that threatened to tear their currency union apart less than a decade ago.

“We made clear, and actually everybody mentioned this, that we have to factor in serious, very serious, consequences for our economy,” Merkel said late Tuesday at a news conference in Berlin.

EU health, interior and transport ministers are due to hold more talks on Wednesday on how to best tackle the disease and limit its wider impact.

Spain and the U.K. joined Germany and France is announcing billions to support businesses at risk of going bust. French Finance Minister Bruno Le Maire even went so far as to say officials in Paris are prepared to consider nationalizing large companies if necessary. In the U.S., Donald Trump is considering an economic stimulus of as much as $1.2 trillion.

“We must act like any wartime government and do whatever it takes to support our economy,” U.K. Prime Minister Boris Johnson said.

The gravity of the situation is forcing policy makers to get creative, and quickly. The idea for joint EU debt issuance was raised by Italian Prime Minister Giuseppe Conte on Tuesday’s video call, according to a person familiar with the matter. Merkel said she was happy for her finance chief, Olaf Scholz -- a pro-European Social Democrat -- to explore the proposal with other ministers.

Joint EU debt remained a taboo for Germany even at the height of the financial crisis after 2008, so the fact that Merkel is prepared to engage in the discussion is a sign of how concerned leaders are at the recession they are facing and the havoc it may wreak on its weaker members.

‘No Conclusions’

“We expect the finance ministers to discuss further on this level,” Merkel said. “I’ll talk to Olaf Scholz so that the German side can take part in this. But there are no conclusions.”

Dutch Prime Minister Mark Rutte, another longstanding opponent of pooled liabilities, was more cautious on joint debt after Tuesday’s EU video conference. He said the EU has tools in place that could serve that function, and he hasn’t seen “a serious and real proposal for a coronavirus bond.”

Conte reiterated that EU governments must do “whatever it takes” to deal with the crisis, adding that no country can hope to shield itself from its impact. Delaying a joint response, he added, would be lethal and irresponsible.

Italy is at the epicenter of the virus outbreak in Europe. For many policy makers, the country was already the bloc’s riskiest member: it has a bigger debt load than any country but Greece, growth has been moribund since it joined the euro, and the size of its economy makes the prospect of a bailout daunting.

Weak Link

France backed Italy’s request and wants the European Investment Bank to issue the bonds, possibly with guarantees by the European Stability Mechanism, the euro-area bailout fund, an official familiar with the matter said.

Conte said that the EU must ensure that citizens receive the care they need and that their economic and social conditions are protected, according to the person familiar with the call. He said a European guarantee fund could be an alternative way to ensure the financing of relief measures.

EU leaders also discussed ways the ESM could deploy its 410 billion-euro firepower. During that discussion, Merkel cautioned that it would be difficult to use money from the bailout fund without any conditions attached, while Rutte was even more skeptical, according to an EU official with knowledge of the exchange. Still, neither of them shot down the idea, the official said.

More Lockdowns

In other developments Tuesday, Belgium drastically tightened its restrictions on citizens, banning all unnecessary movements, keeping only food stores and pharmacies open for customers. Brussels, its capital, is home to the EU’s executive arm and NATO.

The EU also closed its external borders for 30 days. The restrictions will be implemented by member countries over the coming hours. In theory, the ban does not apply to the U.K., but in practice any form of travel has become virtually impossible.

The virus is not just rewiring people’s lives, but also forcing businesses to rethink how they operate.

Europe’s biggest industrial manufacturers from Volkswagen AG to Airbus SE took unprecedented steps to idle plants across the region. Carmakers PSA Group, Fiat Chrysler Automobiles NV and Renault SA are also suspending production, and Mercedes-Benz maker Daimler AG said its halts would affect car, van and truck plants.

BMW AG on Wednesday abandoned hopes for another record year in sales, predicting deliveries will be “significantly below” 2019 levels and profitability the weakest for years. The German carmaker skirted plant shutdowns and instead will rely on shorter shifts and flexible working to rein in output.

(Updates with ministers’ talks in fifth paragraph, BMW in final paragraph)

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