Netherlands, Sweden, Denmark, and Austria argue
that if COVID bonds are grants, not loans, issuance is impossible
Southern European countries criticize them as stingy states blocking EU solidarity
[Asia Economy Reporter Hyunwoo Lee] Since the outbreak of the novel coronavirus disease (COVID-19), the European Union's (EU) plan to issue 'corona bonds' has been delayed, bringing attention to the so-called 'Frugal Four.' These countries argue that since the EU budget is already mostly borne by Northern European countries while Southern and Eastern European countries receive support, providing corona bonds as subsidies is unfair. Southern European countries fiercely criticize the 'stingy' nations for obstructing EU solidarity.
According to Bloomberg and other sources on the 24th (local time), the Netherlands, Sweden, Denmark, and Austria are referred to as the Frugal Four within the EU. These are Northern European countries with relatively low government debt compared to their gross domestic product (GDP) and sound fiscal health. According to the International Monetary Fund (IMF) 2018 World Government Debt Report, the government debt-to-GDP ratios were 52.93% for the Netherlands, 38.46% for Sweden, 34.25% for Denmark, and 73.75% for Austria, all below 90%. This is significantly lower than countries like Spain (97.09%), France (98.39%), and Italy (135.48%), whose government debt-to-GDP ratios approach or exceed 100%, hence the label 'frugal.'
These countries have recently gained attention due to a proposal by Germany and France, the two pillars leading the EU, to issue a 500 billion euro (approximately 667.5 trillion KRW) European Recovery Fund (ERF), also known as corona bonds. When Germany and France suggested providing support in the form of grants rather than debt, these countries opposed the idea. They argue that if corona bonds are to be issued, the fund should be structured as loans with specified maturities rather than grants, and that stringent restructuring measures should accompany the funds provided to recipient countries.
While their commitment to maintaining fiscal soundness is commendable, the problem is that it provokes backlash across Europe. European media argue that these countries should make concessions for EU integration. The term 'Frugal' used to describe them has transformed into a negative label implying stinginess.
In February, these countries also sparked opposition over the Brexit issue, which further amplified their stingy image. At that time, with the UK, which contributed 11.8% of the EU budget, leaving, the EU held a special summit to propose setting the member states' contributions to the EU budget at 1.1% of Gross National Income (GNI) to fill the budget gap. However, the Frugal Four opposed this, arguing that Southern and Eastern European countries, which have mostly received subsidies from the EU budget, should bear the burden, and insisted that the EU budget should not exceed 1% of GNI. Southern European countries criticized this as selfishness obstructing solidarity among EU nations. Previously, about 75% of the EU's 2014?2020 seven-year long-term budget fund was used as subsidies for Southern and Eastern European countries.
The European Commission, aiming to issue corona bonds in line with Germany and France's proposal, finds itself in a difficult position. To allocate resources by including corona bonds in the EU's 2021?2027 long-term budget fund, approval from all 27 EU member states is required by early next year. The Frugal Four insist that corona bonds must be provided strictly as loans, but Southern European countries refuse to accept funds in loan form. Spanish Prime Minister Pedro Sanchez stated at a press conference that day, "Countries like Spain and Italy, which already have high national debt, cannot accept support in the form of loans."
The European Commission plans to announce the draft of the 2021?2027 long-term budget fund on the 27th, along with detailed plans for the corona bonds. According to Politico, citing an EU Commission official, the corona bond plan is expected to propose a compromise between the Frugal Four and Southern European countries, with some funds provided as loans and others as grants.
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