EU proposes scrapping usual conditions for ESM use in virus battle

By Gavin Jones and Giuseppe Fonte

ROME (Reuters) - The European Commission on Thursday proposed scrapping the usual conditions for countries using the euro zone's bailout fund as they try to revive their economies hit by the coronavirus epidemic.

The proposal may make the fund more palatable for Italy, which has always pushed back against conditionality in the use of the European Stability Mechanism (ESM).

Commission Vice President Valdis Dombrovskis and economic affairs chief Paolo Gentiloni said in a letter to Eurogroup head Mario Centeno that countries drawing on the fund would not face any adjustment programme to lower deficit and debt levels.

So-called "enhanced surveillance" of countries taking credit lines will only ensure they use the funds for coronavirus-related health spending.

Once the money is spent and Brussels has checked it was used properly, the surveillance will end, the letter said.

ESM loans are normally subject to a Commission analysis of the sustainability of countries' debts, but in a document posted on its website on Thursday the EU executive said this had already been done.

"Government debts are expected to remain sustainable in all euro area Member States over the (10-year) time horizon of the debt sustainability analysis," the Commission said.

Despite the heavy impact of COVID-19, "the economic situation in euro area Member States is considered to be fundamentally sound," it added.

Italy's ruling coalition, made up of the anti-establishment 5-Star Movement and the centre-left Democratic Party (PD) is split over whether to tap the ESM, which makes available up to 2% of the gross domestic product of countries taking a loan.

For Italy, this would mean some 36 billion euros (32 billion pounds) to bolster a health system initially overwhelmed by its coronavirus outbreak which has so far caused almost 30,000 deaths, the highest toll among euro zone countries.

The PD is in favour of tapping the ESM, but 5-Star says Italy needs grants, not loans, and it has always argued that the conditions normally attached to the bailout fund would risk undermining national sovereignty.

"The Commission's letter doesn't change anything for us, Italy should not use the ESM," said Raphael Raduzzi, a prominent 5-Staw lawmaker who added that he feared conditionality could be added to any credit lines at a later date.

Prime Minister Giuseppe Conte, who is close to 5-Star, reiterated his reluctance to use the bailout fund in a newspaper interview on Wednesday.

"I remain convinced that we don't need the ESM," he told Il Fatto Quotidiano.

(Reporting by Gavin Jones and Giuseppe Fonte; Editing by Giles Elgood)