By Laurence Norman 

BRUSSELS -- The European Union set out a $2 trillion coronavirus response plan, including a massive pooling of national financial resources that, if approved, would deepen the bloc's economic union in a way that even the eurozone debt crisis failed to achieve.

Wednesday's proposal, composed of a EUR750 billion ($824 billion) recovery plan and EUR1.1 trillion budget over the next seven years, aims to lift the region from its economic slump, but must overcome infighting dividing the bloc.

If backed by all 27 member states, the plan would represent a historic step in knitting together national finances across the bloc. The proposal from the European Commission, the EU's executive arm, follows a similar Franco-German plan set out last week and would establish significant new transfers of wealth among members, funded by commonly issued debt.

"This is Europe's moment," said European Commission President Ursula von der Leyen. "Our willingness to act must live up to the challenges we are all facing."

German Finance Minister Olaf Scholz recently compared the proposed assumption of debts across EU borders to Alexander Hamilton's move in 1790 for the new U.S. government to assume states' debts from the Revolutionary War. But unlike the U.S. under the Constitution, the EU remains a club of sovereign states, many of which oppose sharing financial burdens. As the crisis fades and political winds shift, even Europe's more supportive countries could turn against the idea.

The EU aims to provide a massive fiscal injection for the bloc's hardest-hit countries without increasing the already soaring debt levels of southern nations including Italy, Spain and Greece. That would allow those governments to spend more now in response to the pandemic crisis.

Already, a group of wealthier northern countries, including the Netherlands, Denmark, Austria and Sweden, have questioned the plan. Dubbed the "frugal four," they want to avoid the political risk of putting their taxpayers on the hook to repay EU debt issued to fund major spending elsewhere.

"Negotiations will take time," said a Dutch diplomat. "It's difficult to imagine this proposal will be the end-state of those negotiations."

Europe's poorer countries are disadvantaged versus their northern neighbors in how much they can subsidize companies, support workers and stimulate their economies. Germany and other countries that were financially strong before the pandemic have pumped trillions of dollars into their economies and moved quickly to resume business activity.

In the U.S., President Trump has signed four bills to combat the economic hit from the pandemic, including helping large and small businesses and those left unemployed. The unprecedented string of bills totaling nearly $3 trillion was driven by consensus among party leaders who tamped down dissent within their caucuses.

Japan's Prime Minister Shinzo Abe said the total size of its stimulus packages, including some financing aid that doesn't require direct government spending, topped $2 trillion, equal to about 40% of Japan's $5 trillion economy.

The U.K., which recently left the EU, has launched measures including a jobs-support plan costing GBP123 billion ($152 billion), or 5.9% of annual economic output.

Hard-hit EU countries, in contrast, rely heavily on tourism that has been crushed and is unlikely to recover soon. The pain in those countries, all of which use the euro, has prompted northern eurozone countries including Germany and France to act more aggressively than they did during the financial crisis.

The plan's most controversial element, the EU's issuance of debt, would be repaid over several decades, starting only in 2028, through a combination of bloc-wide taxes and increased member-state contributions to future multiyear budgets. Some extra money would start flowing this year to stop companies collapsing and keep public investment flowing.

The EU has already approved a EUR540 billion emergency response package including money for unemployment schemes, a loan facility for firms and precautionary credit lines from the region's bailout fund.

All EU countries must approve the recovery plan, which includes EUR500 billion in grants and EUR250 in loans to hard-hit members. While many compromises will be needed, the biggest fights are likely to arise over the split between grants and loans, what strings are attached, and how to win over the EU's newer, poorer members in its east.

The plan, if approved, would respond to demands from the European Central Bank for the region's governments to match its ultra-easy monetary policy with coordinated, large-scale fiscal efforts. German Chancellor Angela Merkel's backing for a massive recovery plan followed a recent decision by the country's constitutional court raising doubts over the legality of ECB bond-buying programs. Those programs underpinned the EU's recovery from the financial crisis almost a decade ago.

EU officials are braced for weeks of arguments. They hope that national leaders will be able to meet in person in June to find a compromise, though many say further talks may be needed and that an agreement before summer isn't guaranteed.

Raising debt isn't new for the EU, which raised tens of billions of euros during the financial crisis to fund a eurozone bailout fund. But the scale would be far greater and break a taboo forbidding the EU's executive body from taking on large amounts of debt.

While officials in Berlin, Paris and Brussels say this would be a one-off action, prompted by the massive economic shock of the coronavirus, the proposal could help address a structural problem that has dogged the EU and its 19-country eurozone -- the two-tier split between wealthy countries and cash-strapped ones.

In a bid to win their support for the plan, the Commission's proposal included significant new cash for eastern member states -- which haven't been gravely affected by the health crisis. These countries have previously been major beneficiaries of the bloc's largess. But amid strains over migration and rule-of-law issues between Brussels and members including Hungary and Poland, some diplomats said there will likely be an effort to squeeze the proposed cash for East European countries in a final, less ambitious version of the plans.

Write to Laurence Norman at laurence.norman@wsj.com

 

(END) Dow Jones Newswires

May 27, 2020 12:06 ET (16:06 GMT)

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