MNI POLICY: Rescue Fund 'Critical' to Eurozone Recovery - Rehn

By Luke Heighton

     FRANKFURT (MNI) - The European Commission's proposed EUR750 billion

Covid-19 rescue package comes at a "critical" moment for Europe, Finnish central

bank chief Olli Rehn said Thursday, anticipating that national leaders will

insist on stricter conditionality for accessing funds.

     Offering countries access to loans would mean there was 'skin in the game'

for every member state to use the money effectively," Rehn said, "[but] they

also lead to an even higher public debt for the countries most affected by the

corona crisis. That is not useful. Gifts are appropriate in response to

immediate needs."

     Rehn, an adviser to the Finnish government during the Finnish banking

crisis and a key player in Brussels during the global financial crisis, the euro

crisis and the Greek crisis, was critical of round-the-clock negotiations to

hammer out a deal, which he said might lead to a less desirable outcome given

the fund's position as both "an essential building block for the response to the

crisis" and "the necessary bazooka to calm the markets and boost the economies."

     "Nightly deals are risky," he said, adding that they are "certainly not

always the result of rational preparation and logical thinking. More

second-rate, suboptimal. What I expect is that leaders will set stricter

conditionality on using money from the recovery fund. The Commission proposal is

not particularly clear on this point. The money should be used for investments

that help combat climate change, in renewable energy. But also to strengthen the

productivity and competitiveness of the economies."

     Were the fund to pass, Rehn said, "it would take some of the burden that

the central banks carry now. It provides a fairer division of labor between

monetary aid from the ECB and fiscal policy of the Member States." Were it to

collapse, dissatisfaction with the EU will increase, with potentially dangerous

consequences. The EU is not in a "good condition," Rehn continued. "She has

shown stamina, the EU still exists, but we are all better off if we avoid

further fragmentation and populist responses."

     The Stability and Growth Pact is an "anchor" for national budgets,Rehn told

the Dutch newspaper de Volkskrant, providing "confidence and credibility" once

the acute phase of the corona crisis - during which it was suspended - has

passed.

     The second phase "is about the support for investments, for unemployment

schemes, then you should not use corona as a cover up for permanent increases in

expenditure. The third phase is that of stabilization, which requires the

Stability Pact. The pact is much smarter than many think. It offers guidance to

limit debt."

     Countries that built up financial buffers before the crisis are now likely

to come better than those without, Rehn said, adding that in the medium term

very low interest rates made it "highly desirable for euro area countries to use

this breathing space to restore their economies and budgets."

--MNI Frankfurt Bureau; +49-69-720-146; email: luke.heighton@marketnews.com

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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