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French President Emmanuel Macron and German Chancellor Angela Merkel have this week proposed a £447billion (€500bn) bailout for member states hit hardest by COVID-19, but experts have warned the funds may not be enough to prevent the economic turmoil in nations including Italy, Spain and Greece. The fund which is yet to be approved by all 27 EU member states, comes amid deep divisions within Europe, after Germany’s top court ruled the European Central Bank’s (ECB) plan for mass bond-buying to stabilise the eurozone partly violates the German constitution.
On the EU bailout, US economist Nouriel Roubini, lecturer New York University’s Stern School of Business, told German business magazine Wirtschaftswoche: “The fund is smaller than Italy, Spain and Greece had hoped.
“Perhaps that will be compensated for if most of the disbursements become subsidies instead of loans.”
The European Commission has forecast Italy’s economy will contract by as much as 9.5 percent this year, while the public debt is expected to jump to 158.9 percent of GDP – rising to 170 percent in 2021.
Mr Roubini has warned “the danger comes from Italy” if the ECB is unable to help surface the county’s debt through bonds.
The economist warns the consequences are fatal if a financial solution cannot be found, he said: “Otherwise the eurozone will collapse within a year.”
He added: “Even if the ECB helps, Italy has to restructure the bonds.
“Remember, Italy is a problem ten times bigger than Greece.”
A bond is debt-based investment, where funds are loaned to a Government for an agreed rate of interest.
Mr Roubini indicated Italy may not be able to keep up with repayments if Europe’s single currency has a sudden economic bounce back.
He said: “If the value of the euro does not fall enough, Italy’s only option is to leave the eurozone.”
Ms Merkel and Mr Macron published a proposal to help the EU and borrow €500bn as a common debt shared out between member states.
The funds would be transferred to regions and industries hit hardest and increase the EU’s 2021-2027 budget which is already close to €1 trillion.
The French President said: “That’s a real change in philosophy, I believe this is a very deep transformation and that’s what the European Union and the single market needed to remain coherent.
“It’s what the euro zone needs to remain united.”
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The plan to share debt across the EU has called divisions with the so-called frugal northern countries of bloc, such as the Netherlands, Finland and Austria – as the vast majority of the borrowed funds will go to other nations.
German Chancellor Angela Merkel said the financial package should be paid back over a long period and that Berlin would shoulder roughly 27 percent of the funds, as it already does for the regular EU budget.
Ms Merkel said: “We must act in a European way so that we get out of the crisis well and strengthened.”
The European Commission will present its own proposal for a Recovery Fund linked to the EU’s next long-term budget on May 27.
European Commission President Ursula von der Leyen said: “It acknowledges the scope and the size of the economic challenge that Europe faces, and rightly puts the emphasis on the need to work on a solution with the European budget at its core.
“This goes in the direction of the proposal the Commission is working on which will also take into account the views of all member States and the European Parliament.”
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