Friday 27 March 2020
Coronavirus has split northern Europe from the poorer south like never before. As the likes of Germany try to weasel themselves out of a common response the EU is struggling to make the case for solidarity more than ever.
A full-on political fallout may have been averted, but the writing is on the wall for European unity after EU leaders yesterday failed to answer Italy’s call for badly needed financial support.
Even before Italy became the epicentre of the coronavirus outbreak, Rome had been pleading with the European Central Bank and big players like Germany for a common debt instrument, aka Eurobonds, to help resolve its crippling banking crisis. Now that the Eurozone’s third biggest economy badly needs finance to not only keep its banks solvent but, like the rest of Europe, to stop its economy from collapsing as a result of coronavirus that call has become ever more desperate.
Yesterday’s teleconference between EU leaders was billed as an opportunity to showcase the bloc’s solidarity, but achieved nothing of the sort as Germany and the Netherlands in particular kicked the coronabond – as the Eurobond is now known – appeal into the long grass.
In a letter addressed to the @eucopresident, PM from six member states (🇧🇪🇫🇷🇬🇷🇮🇪🇮🇹🇱🇺🇵🇹🇸🇮🇪🇸) make the case for #Coronabonds: "We are all facing asymmetric external shock, for which no country bears responsibility, but whose negative consequences are endured by all." pic.twitter.com/ppRPgCMcCm
— Beatriz Ríos (@BeaRios_) March 25, 2020
“There’s still a great disagreement in Europe about the long-term” economic response to the crisis, said Dutch PM Rutte on Thursday.
“You are aware of the letters from some member states who have imagined or are imagining corona bonds,” Angela Merkel told reporters after the meeting. “We have said from both the German and other sides that this is not…the view of all EU countries.”
The German chancellor was referring to a letter jointly signed by nine EU leaders calling for the “severity of the situation” to be recognized and for “further action to buttress our economies today, in order to put them in the best condition for a rapid recovery tomorrow.”
Part of the rich North’s hopes of heading off demands for coronabonds comes in the shape of the ECB’s €750 billion bond buying scheme. While the Pandemic Emergency Purchase Programme will make it easier for Rome to access finance, it will put the country in even more debt, “20 to 50 percentage points to Italy‘s debt-to-GDP ratio over a number of years,” estimates the FT’s Wolfgang Munchau – national debt is 135%. The cost of those bonds may have halved since the ECB announced its rescue package last week, but yields are still the highest in the Eurozone, bar Greece.
The ECB’s big spend was a desperate gesture to restore confidence after the central bank’s president, Christine Lagarde said she would not do whatever it takes to keep Italy solvent, sending markets into turmoil. The only way for Lagarde to row back was by putting together a massive rescue programme. The €750 billion therefore owes itself more to luck than anything else. Had Lagarde been motivated by a sense of EU solidarity, she would have followed her predecessor Mario Draghi, who at the height of the last debt crisis said he would do “whatever it takes.”
My FT column on why the eurozone needs discretionary stimulus, not just more credit. https://t.co/2ObqsseX0p
— Wolfgang Munchau (@EuroBriefing) March 22, 2020
Munchau astutely points out that Italy and other struggling EU nations like Spain and even France, both signatories of the letter, would be better off with direct grants, not credit. On Tuesday, European Council President Charles Michel – perhaps in full expectation Italian prayers would not be answered at the upcoming teleconference – called for stimulus to come from the EU’s central budget.
“The way we are going to put in place what I call a Marshall Plan-like stimulus strategy,” said Michel on Tuesday. “And when I say Marshall Plan-like, I say with a strong ambition.”
All well and good having that ambition, but it’s of little use without the money and the will. Michel said capital should be mobilized “in the framework of the European budget” – i.e. direct grants – but the current seven-year cycle ends in December, which means spending cannot be easily pushed onto the next budget as is the norm under the EU’s dodgy spending practices.
Currently, all 27 EU member states are locked in a stalemate over the 2021-2027 spending plan. The will is lacking because those rich northern countries understandably refuse to pick up the tab for the shortfall caused by one of their brethren, the UK, abandoning ship. Why not scale back on EU spending plans, some sensibly argue. Deaf ears.
Which means the new Marshall Plan will be nothing like the American-backed original and will come to nothing. The EU will dress up whatever spending it can chuck in as much needed leverage for many more billions of private spending, the overall figure will look impressive, but it’ll amount to nothing in real terms.
"If you draw boundary between the countries of the nine EU leaders who signed the letter … and those who didn’t, you can neatly break eurozone in two: south-western and north-eastern …" | The Eurobond Nine https://t.co/Ug1SEqd133
— Peter Rough (@peterrough) March 26, 2020
The other option being mooted, which mirror’s the ECB’s pandemic package is the €500 billion European Stability Mechanism (ESM), a bailout fund created on the back of the sovereign debt crisis.
“With the ESM we have a crisis instrument that opens up many possibilities for us that do not call into question the basic principles of our common and responsible action,” said Merkel yesterday as an assurance to mask the lack of progress at the teleconference with other EU leaders.
However, in order to receive ESM funds, the insolvent state must agree to a whole range of reforms, in other words, Greek-style austerity.
Commentators speculate the rich half of the Eurozone aren’t observing the lessons of recent history and want to narrow Italy’s options so that it takes up the ESM offer and austerity along with it.
“Every economic crisis is a cleansing. One can exploit it to emerge stronger,” said Austria’s ECB governor last week. Vienna is known to be fully aligned with Berlin’s view of the situation.
And why shouldn’t they? It’s not for the rich countries to constantly bailout the poor, but for the poor to get their act together, a universal truth, many would say, as would this blog, but in the twisted world of European monetary union the odds are permanently stacked against the weaker economies. Not fair.
Both Germany and the Netherlands benefit from an undervalued currency by virtue of being in the Eurozone, which is why their manufacturing sector runs riot in exporting worldwide, even though labour and energy costs are high. If the European single currency has any future, and judging by the last ten years that looks extremely unlikely, there need to be quid pro quos. If the rich countries continue to rake it in through undervalued exports, the poor countries should benefit, either from cash transfers via shared taxation or from common debt instruments where the rate of interest is representative of the whole Eurozone, much like the Euro’s external value but with the benefits going to poorer states.
This is the European Union though. There’s no sense of fairness, a fact disguised and fudged on an almost daily basis over the course of the past crisis-ridden decade. But with coronavirus igniting renewed trust in the nation state at the expense of Euro-federalism the bloc is becoming visibly fragmented. The EU is seen to be either doing nothing or not nearly enough. There’s no masking the lack of unity and outright divergence of opinion, not only with regard to financial rescues but also how to deal with the virus itself – Hungary’s policy of closing its borders have been popular and effective in equal measure to Brussels’ great annoyance.
A long overdue reckoning is surely imminent.