Germany shops lines
Image Credit: AP

Europe's first instrument to help economies weather the impact of the pandemic - a 240 billion-euro ($260 billion) credit line - is now operational. But whether anyone will use it remains unknown.

Over a virtual meeting Friday, euro-area finance ministers gave their final OK to the program, which will be run by the European Stability Mechanism. Governments will have access to cheap funds worth up to 2% of their 2019 output, without any of the onerous belt-tightening terms that were attached to the loans granted during the sovereign debt crisis.

"Today is a good day for Europe and a good day for practiced solidarity," German Finance Minister Olaf Scholz said in a statement in Berlin before the meeting. "For each euro-area member, huge funding will be available to finance direct and indirect healthcare costs."

Yet despite making financial sense for several countries that have seen borrowing costs spike, countries have so far remained reluctant to even suggest they are considering using the emergency tool, concerned that asking for such aid could carry a stigma. Instead, governments in countries like Italy, Spain and Portugal have said they plan to continue raising funds on the markets.

Under the agreed tool, the ESM will be able to lend all euro-area countries on terms normally reserved for sovereigns with a pristine credit rating, and with few questions asked. For Italy, this means it could receive 36 billion euros in ultra cheap loans - a sum that could conceivably increase should there be a major need.

With borrowing costs in the euro-area periphery creeping up over the past few months amid a virus-induced economic slump, cash-strapped governments could benefit from billions in much-needed interest savings for the outlays needed to cushion the blow. Over a 10-year horizon these could represent up to 2 billion euros for Spain and 7 billion euros for Italy, ESM Managing Klaus Regling said.

Backed by Germany's creditworthiness, the ESM borrows money at negative yields, which it then lends to euro-area member states after charging small service fees. In current terms, the interest rate on such loans could be around 0.1%, Regling said.