April 24, 2020
EU is gridlocked over €1 trillion coronavirus fund – here’s a way forward
An EU leaders’ summit has produced no definitive progress on saving Europe’s southern nations from the greatest slump in living memory. There is talk of a recovery fund of at least €1 trillion (£873 billion), now that EU leaders are realising that the €540 billion package announced previously may not be large enough.
Yet north-south divisions blocked further progress, amid big disagreements about how this fund should work. Germany and the “frugal four” of Austria, Netherlands, Sweden and Denmark are insisting that most money should be distributed via government loans, with a relatively smaller aid fund.
Italy, France and Spain are pushing for a total fund of €1 trillion to €1.5 trillion of grants not loans, arguing their national debts are too high to borrow more. The controversial question of issuing eurobonds to fund these grants was noticeably sidelined, as the southern nations called for funding as soon as possible. Italian premier Giuseppe Conte calls it a “political emergency”.
All that EU Commission President Ursula von der Leyen would say after the meeting was that the fund would need a “sound balance” between loans and grants. With important decisions postponed until May, the struggling countries must hang on. In response, the euro fell against the dollar.
At root of these disagreements lies the EU’s incomplete political and economic architecture, which becomes apparent in every crisis. With a weak political centre in Brussels, any of the 27 members can veto a decision indefinitely. For the 19 in the eurozone, there is also the euro straitjacket.
Without flexible exchange rates, coordinated government economic policies, or a strong mechanism to reallocate investments to ailing members, the common market directs economic growth to its most productive regions and leaves the weaker ones behind. This was the true cause of the Greek crisis, and it’s an economic time bomb for Italy, Spain and Portugal. Add long historical disputes and wide cultural differences, and the EU looks particularly ill-equipped for a pandemic.
Tourism is a flashpoint. Europe attracts over 50% of all global tourism, and the south depends on it the most. Travel and tourism is 13% of Italy’s GDP, 14.3% of Spain’s and 20.8% of Greece’s, much more than the 8.5% average of the “frugal four”. And it doesn’t fall evenly across the year, promising a greater shock if holidaymakers stay away this summer. This is a strong motivation behind southern countries considering lifting lockdown restrictions, knowing it could re-accelerate infection rates.
Of course, similar principles apply to every economic activity that needs people to be physically present. That would include shipping, logistics and agriculture. For example, agriculture contributes 2% to 4% of GDP to southern EU countries, which is twice that of northern members. These governments are basically stuck between the hammer and the anvil – hence the need for urgent assistance.
The good news is that the economic damage from lockdown should be temporary, provided EU leaders prevent healthy businesses going bankrupt. The first €540 billion package and the European Central Bank’s €750 billion commitment to shore up members’ sovereign bonds and other financial securities were a good start, but clearly more is necessary.
Behind the scenes, the pressing question remains where to find the necessary money quickly enough. The answer being proposed by nine EU members, including Italy, Spain and France, was to issue common EU debt for the first time to allow weaker countries to keep borrowing at low interest rates.
This could take the form of eurobonds, setting a permanent precedent for centralised borrowing in which all EU members guarantee the debt. It could be a so-called coronabond, where the debt could only be used to tackle the pandemic. Or, as suggested by billionaire George Soros, it could be an EU perpetual bond, which would exist permanently and the principal would never need repaid.
Europe’s northern nations strongly oppose all this. Some argue that it requires EU treaty changes that would be too time consuming, but the real issue is having to underwrite debts racked up by the south. The latest leaders’ meeting suggests this is a no-go for the time being, which is why the debate has shifted to grants vs loans.
How to spend it
Assuming a breakthrough that makes funding available by the second half of this year, members must also focus on how funds should be directed. A good option would be a productivity investment plan for the whole EU, in which funding would be geared towards making countries more productive. Weak productivity has been a bugbear for southern European nations for years, so everyone benefits from improving this.
Funds could potentially also be geared to helping northern countries: Angela Merkel has said that even in mighty Germany, infrastructure, education, green energy and technology are lagging.
Even then, without common EU borrowing, having to contribute to a recovery fund risks putting too heavy a burden on the south. Instead, the EU could raise funds by clamping down on tax havens now that the UK veto is not an obstacle. Any investment in this – beefing up the resources of tax authorities, say – will probably produce multiple returns. Curbing such inequality would also help legitimise the EU to many citizens who feel it doesn’t work for them.
Yet arguably the most important issue is the need for a united EU stance just now. This could take the form of common rules around opening up travelling and fully resuming economic activity. Member states should also agree on a pan-EU healthcare system protection, since without it southern nations could cut their commitments to care for citizens from other EU states to protect their ailing economies. This would force other members to follow suit.
Through crises come opportunities – remember it took a catastrophic war to unite Europe. The EU can be a platform for policies which will safeguard its citizens’ health, reduce inequality, promote education and promote the environment. More than ever, Europeans must act decisively to bolster the union.