The European Union executive wants to channel more funds to Italy, Spain and other countries hit hardest by the novel coronavirus in an updated proposal for the bloc's 2021-27 joint budget, an internal document shows. Lockdown measures imposed from mid-March to halt the pandemic are expected to push the economy of the 27-nation EU into a deep recession. The bloc has already agreed a rescue package worth half a trillion euros, and combined joint and national measures to help businesses and households total some 3.2 trillion euros. But EU members are divided on how to finance further economic recovery, with fiscally conservative northern countries opposing southern countries' calls for joint debt issuance. The executive European Commission has proposed to incorporate support into the EU's next long-term budget, known as the Multiannual Financial Framework (MFF), which is currently being negotiated. An internal note on the matter seen by Reuters said one area of focus will be so-called cohesion funds, which aim to help poorer EU regions catch up though redistribution of money from the joint coffers to which member states contribute. The document said a supplementary allocation should be proposed for countries hit hardest by the coronavirus crisis, adding: "This should be additional to the overall allocation. The credibility of such an idea will not pass muster if it is seen as merely moving funding from some countries to others." The document also said "an ambitious and strengthened cohesion policy" could be a key component of efforts to provide support via "a robust and fit-for-purpose" MFF. The role of cohesion funds is part of a wider debate about how the MFF can be leveraged to kickstart growth in the bloc of 450 million people. An EU official said the Commission was looking at the overall size of the MFF, whether to create a new instrument dedicated to the health sector and how to provide more aid for ailing southern countries. JOINT DEBT VIA PROXY? Germany, the Netherlands, Finland and Austria have so far rejected calls from France, Italy, Belgium and others to issue mutual debt. The Brussels-based executive is now considering raising funds centrally. Asked by newspaper Handelsblatt if the EU could finance a recovery fund by selling up to 1.5 trillion euros of bonds guaranteed by member states, European Commission Vice President Valdis Dombrovskis said: "I could imagine such a financial framework. But nothing has been decided yet." The 27 national EU leaders will debate the matter at a videoconference summit on April 23. Mario Centeno, chairman of euro zone finance ministers, said in a letter on Sunday they had agreed to work on a recovery fund to "help spread the costs of the extraordinary crisis over time through appropriate financing". "Some Members were of the view that it should be based on common debt issuance, while others advocated alternative solutions, in particular in the context of the Multiannual Financial Framework," he wrote to Charles Michel, who chairs meetings of EU leaders. Using the bloc's joint coffers to raise more money on the market would require approval -- and potentially more contributions or financial guarantees -- from all EU states. Feuding over the MFF has seen poorer countries demand more aid and their "frugal" peers determined to rein in spending, especially after the 75 billion euro shortfall left by Brexit. The latest proposal, which failed to win the necessary unanimous approval in talks in February, would cap joint spending at about 1% of the bloc's economic output, or some 1 trillion euros. The Commission and Michel are keen to use the coronavirus crisis to recast that proposal and rally member states behind it, though much detail is still missing. Guntram Wolff, director at the Bruegel think-tank said the MFF should be redrafted to establish Italy as a beneficiary rather than a contributor, but that using it to guarantee major borrowing would face opposition. "Where the MFF can play a significant role is rearranging transfers between member states. While some joint borrowing is allowed, taking it to 1.5 trillion euros would put the EU in a completely different paradigm," he said. "It would turn the Commission into a Treasury and essentially issue EU debt, and the political appetite for that is extremely limited in northern EU quarters."
