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Toward a European Reconstruction Fund

Following a recent agreement by the Eurogroup of eurozone finance ministers on a COVID-19 rescue package, Europe is well positioned to maintain liquidity for the time being. But if it wants to avoid political infighting and set the stage for a post-pandemic recovery, it will need to go further.

BRUSSELS – Last week, the Eurogroup of eurozone finance ministers, having acknowledged that nobody is to blame for the COVID-19 crisis, agreed to a deal to mitigate its economic fallout. The agreement includes €25 billion ($27.2 billion) in fresh funding for the European Investment Bank, €250 billion ($272 billion) for the European Stability Mechanism (ESM), and €100 billion ($109 billion) for the creation of a new instrument through which the European Commission can help member states manage their looming unemployment crises. All told, the package amounts to a substantial sum: around €500 billion in loans (when accounting for the leverage of the EIB’s programs).

Politically, any agreement on a eurozone-wide deal is a success in itself, considering the deep divisions of just a few weeks ago. And, economically, the deal means that Europe is now supported by a combination of safety nets that will make another euro crisis highly unlikely.

As a result of the new agreement, if a eurozone member state faces difficulties financing the enormous outlays needed to support its economy during the COVID-19 lockdown period, it will have a number of options. It could tap into the European Central Bank’s large new Pandemic Emergency Purchase Program (PEPP), or it could request a loan from the ESM, which is now constrained by fewer conditions. Crucially, the new ESM program opens the door for the ECB to expend near-unlimited firepower through its Outright Monetary Transactions (OMT) program.