The EU’s response to COVID-19 has given plenty of ammunition to its opponents. Frontiers have been closed and supply chains broken as countries have put their own needs first.
Trust among governments has diminished, with France and Germany banning medical exports in the early days of the crisis, to the fury of Italy, while the long-running north-south rift over the future of the eurozone risks widening into a dangerous chasm.
The economic depression will hit government revenues and lead to soaring public debt and unemployment. But the virus’s impact on Member States will be uneven: some will suffer more deaths, some start with loads of debt and some depend on industries like tourism that will be severely affected.
Several southern countries, and especially Italy, face particularly grim prospects. Italians feel that after the eurozone and migration crises the EU is once again abandoning them, and they are becoming more eurosceptic.
Their economy has scarcely grown since the birth of the euro and its public debt of 135 percent of GDP may be heading towards 200 percent. The populist Matteo Salvini now questions EU membership and his League is well-placed to win the next election. One recent opinion poll found that 49 percent of Italians want to leave the EU.
The European Commission has struggled to deliver strong leadership, with its efforts to coordinate responses to the Coronavirus crisis, and more recently steps towards lifting the lockdowns, gaining little traction in national capitals.
But to be fair to it, most of the key levers on health, borders and the economy remain with Member States.
The Commission has done its best, for example by lifting limits on state aid and budget deficits, persuading governments not to ban exports of medical equipment and launching ‘SURE’, a plan for subsidising the costs of short-time working in Member States.
"The European Commission has struggled to deliver strong leadership, with its efforts to coordinate responses to the Coronavirus crisis, and more recently steps towards lifting the lockdowns, gaining little traction in national capitals"
The European Central Bank has come up with an impressive €750bn bond-buying programme, which has helped to reduce spreads between Italian and German debt. But the ECB cannot single-handedly defeat the looming depression.
The EU needs to take on a role in fiscal policy. France, Spain and Italy are among those pushing for some sort of ‘eurobond’.
The basic idea is not for existing public debts to be mutualised – there would be no chance of getting that formula past North European governments – but rather for the EU or a related entity to raise new money that would be guaranteed by the member-states and spent on alleviating the Coronavirus crisis.
The biggest share of the money would go to the neediest countries, to subsidise spending on health, corporate grants, unemployment pay and investment. (One of the most coherent eurobond proposals, from Christian Odendahl of the Centre for European Reform, Sebastian Grund of Harvard Law School and Lucas Guttenberg of the Jacques Delors Centre, is for a €440bn ‘Pandemic Solidarity Instrument’)
Eurobonds would mean the better-off EU countries helping to limit dire outcomes in southern Europe. The Germans, Dutch and other northerners have long opposed the idea, arguing that their taxpayers should not be liable for loans to southerners and that eurobonds would discourage weaker countries from undertaking painful structural reform.
"If the EU cannot respond to COVID-19 by moving towards some sort of fiscal union, it will lose credibility in many Member States. And if Northern Europe fails to accept eurobonds during such a dire and existential crisis, it never will; and that would raise questions about the euro’s long-term survival"
They have a point, but the alternative – eurozone members sinking into a negative spiral of falling GDP and rising public debt, and perhaps exiting the euro and/or the EU – would be worse for all concerned.
In recent weeks the north-south rift has become acute, with Portuguese and Dutch politicians exchanging insults. EU ministers did sign up to a compromise package on April 9th, including €100bin for the Commission’s SURE scheme, €200bn of extra European Investment Bank credits and around €240bn of new credit lines from the European Stability Mechanism, the existing bail-out fund, for medical purposes.
None of that was what southern Europe most wanted or needed. However, ministers did also agree to set up a recovery fund, “temporary, targeted and commensurate with the extraordinary costs of the crisis”, to help trigger a post-lockdown economic rebound.
Their inability to agree on the fund’s size or sources of funding leaves unresolved the question of whether eurobonds will emerge. Also left open is the degree to which the EU’s seven-year budget package – due to be finalised this summer – can be redesigned to tackle the effects of the Coronavirus crisis.
If the EU cannot respond to COVID-19 by moving towards some sort of fiscal union, it will lose credibility in many Member States. And if Northern Europe fails to accept eurobonds during such a dire and existential crisis, it never will; and that would raise questions about the euro’s long-term survival.