Divided in adversity
The economic response to COVID-19 threatens to make or break Europe
The coronavirus pandemic hit Europe out of nowhere. The last time the world was confronted with something similar to the health crisis we are currently facing was probably the Spanish Flu of 1919. Mistakenly, the developed western democracies thought themselves quite safe from the Asian outbreak. Partly due to the fact that this is a completely new virus, partly due to the suspected opacity with which the Chinese Government disclosed the exact figures and numbers of the epidemic, and partly due to fact that we wrongly considered our healthcare systems capable of confronting the numbers we initially expected (Germany has 10 times more intensive care units per 100.000 inhabitants than China, France and Italy around 4 times more, and countries such as the UK and the Netherlands around double the amount), the entire Continent was taken by surprise. The measures that had to be implemented with extreme urgency to stem the tsunami which was overtaking our healthcare systems essentially put a stop to the European economy in most Member States, launching the EU into a recession which according to some estimates will be worse than in 2008 or than in 2011.
The GDP of most Member States for 2020 will slump around 7% to 9% in most of the larger economies provided they will slowly open up again for the rest of the year. While some sectors of the EU, such as consolidated industries, construction, and services will probably be able to absorb the shock after reopening, others, such as transport, tourism, SMEs and the restoration sectors face an existential crisis. As the stark reality of such a devastating crisi started to sink in, a long-standing fault line along within the EU became more than ever evident in relation to what the coordinated European response to such a shock should be.
For more than a month EU leaders find themselves divided in a crisis that, according to many observers and leaders, risks definitively killing an already stagnant European project.
The faultline along which the EU countries stand divided has long roots, and revolves around the idea different leaders, parties and countries have of what the European project should be. Should the European market be completed and move towards an integrated system with fiscal and public debt emission aspects, or should it remain a simple free-trade and movement area with common rules and regulations? This debate, which has been ongoing ever since the creation of the Union itself, has recently been accelerated by the violent economic shock that the virus has brought upon the EU. What principles should the recovery plan follow? Should it be a concerted effort with aspects of burden-sharing or should it be left to Member States to address the crisis with their national budgets?
Along these broad fault-lines the EU 27 and the Eurozone’s 17 have been deeply divided in opposed fronts. On one side the so-called “frugal four”, a group formed in opposition of proposals for the enlargement of the EU budget from 2021 to 2027, with the Netherlands taking the strongest stance (Austria, Sweden, and Denmark being the remaining members of the alliance), who are strongly opposed to responses based on burden-sharing, and on the other a group of nine countries, in which Italy has taken the strongest stance, but which counts also France, Spain, Ireland, Slovakia, Portugal, Greece, Slovenia, and Luxembourg, in favour of common measures such as the unconditional use of the European Stability Mechanism (ESM) and common EU Bonds (both are explained in our previous article), the argument being that a symmetric fault which was the fault of no country should be faced in a symmetric manner by all Member States. Of course, domestic issues are part of the reason why certain countries lean more towards one solution rather than another. The real risk for a number of Member States is that after the crisis they will have to carry the burden of a very large public debt, and risk having difficulties in refinancing their state budgets on the financial markets. The fear of a brand new European debt crisis which could lead to another double dip recession (two consecutive recessions) for Member States with high public debts or with high yields on government bonds is very real and would have devastating consequences for their population’s commitment to the European project. .
It was with this strong internal division amongst Member States that the European Council of the 28th of March failed to find a compromise on the response to the pandemic. The initial draft conclusion of the Council simply called for the use of the ESM (followed by highly unpopular debt restructuring, austerity, cuts, and economic reform) for the countries who couldn’t deal with the crisis by themselves. While an agreement seemed impossible, the Council decided to concede more time for negotiations in April and a quite strained debate ensued, shining light onto how different positions are within the Union. Tensions reached a highpoint in the immediate aftermath of the summit, when Dutch Finance Minister Wopke Hoekstra called for “investigations” into why certain countries preferred a common response and were trying to avoid accumulating large quantities of debt unilaterally, and Portoguese Prime Minister Costa defining such statements as “disgusting” and against the spirit or Europe.
With tensions running high and the debate still ongoing, a compromise was reached after extenuating negotiations during the Eurogroup summit of the 10th of April. A broad agreement was negotiated around the implementation of the EU Commission’s SURE Programme, for a 100 billion Euro investment programme coordinated by the European Investment Bank (EIB), and for the possibility to activate 240 billion Euro (roughly half of the total capacity) of the ESM for up to 2% of the GDP of the country asking to access the credit, but only for medical expenditures (not to contrast the economic recession). While these measures are of limited impact (SURE and the EIB initiatives will take time to activate, and the ESM is only available for medical expenses) compared to the costs of the crisis, the most significant part of the agreement — the Recovery Fund — is quite ambiguous, and will have to be better defined by the European Council on the 23rd of April. In the document, an agreement was reached on the creation of a Recovery Fund to be “commensurate with the extraordinary costs of the current crisis” and to be funded by “innovative financial instruments”: for the French Finance Minister Bruno Le Maire “it can only be Eurobonds”, while as for Wopke Hoekstra, his Dutch counterpart, it clearly isn’t. The rift within the EU still stands
While Italy and France are upping the game, with Prime Minister Giuseppe Conte stating that “Italy will fight until the end for Eurobonds” and French President Emmanuel Macron insisting that “without Eurobonds Europe will die”, the European Parliament recently adopted a resolution encouraging the EU 27 to permit an unconditional activation of the ESM for all it’s capacity, and for the creation of a Recovery Fund to be financed by common bonds. Angela Merkel, the German Chancellor, on the other hand expressed her Government’s opposition to European Bonds, while public opinion in Germany itself remains divided. Germany is likely to be the deciding vote in the rift which divides European countries, and the stance it will take in this crisis is likely to greatly influence the outcome of the next European Council. But recent weeks have also seen clearer definitions of the positions EU Member States have taken on such an existential crisis with Belgium, Poland, Romania, Cyprus, Malta, and Latvia publicly supporting the proposal, and Estonia and Finland siding against it. It remains to be seen what final agreement the European Council will reach in the end, but now more than ever the feeling that Jean Monnet’s prediction that “Europe will be forged in crises, and she will be the sum of the solutions brought forth to solve them” now more than ever rings true.
by Liam McCourt
