A Woeful Forecast
As European Union member states begin to tentatively ease their lockdowns, the economic forecast for the EU predicts a significant downturn in GDP. Reporting in May, the EU Commission’s Spring 2020 forecast has suggested that the union’s economy could shrink by 7 ½ percent in 2020, with certain states disproportionately being hit hardest; the respective economies of Italy, Spain, Greece, and Croatia could each shrink by as much as 9 percent.
The union itself has been fraught with conflict and indecision since the early days of the outbreak in Italy. Where there should have been collective effort, nations began to prevent the exporting of crucial medical supplies. Where there should have been reassurance, instead the European Central Bank (ECB) President Christine Lagarde’s comments that “we are not here to close spreads”, caused the yield on Italian bonds to spike much to the outrage of Italians.
Although the EU formally apologised to Italy in April, the resultant discontent from the perceived failings of EU collectivism and management has significantly damaged the EU’s standing in the eyes of Italians. Tellingly, an opinion poll taken in March found that 88 percent of Italians felt that the EU was not providing enough support. Moreover, from the same poll, 67 percent of Italians felt that being a part of the EU was a disadvantage – up from 47 percent in November 2018. Nationally, Italians have been galvanised in their response against the EU with cross-party condemnation of the EU’s response.
Allowed to coalesce and strengthen further these elements could bring about what the EU’s Economy Commissioner has labelled an “existential threat”. For if financial recovery is perceived as uneven and disproportionate the discontent expressed by Italy could snowball and threaten the EU itself. Central to how the EU moves forward is what kind of economic package will be distributed across the bloc. And it is in these discussions that one finds some deeper and historic fault lines emerging.
The central-most issue that has torturously defined the financial debates between member states until late has been the ratio of grants to loans in any proposed economic package. This has found its most potent manifestation in the debate surrounding Corona bonds. Conceptually, this fiscal device provides the European Investment Bank the powers to issue a joint debt across member states. This collective responsibility would assist economically weaker nations in financing their domestic responses to the pandemic. Meanwhile, the shared burden would prevent a recipient nation from being crushed by unsustainable debt or having to implement austerity measures as a condition for accepting assistance as had happened to Greece, Italy, and Spain, throughout the previous decade.
Support for Corona bonds currently spans across nine EU nations: Greece, Italy, Spain, France, Belgium, Luxembourg, Portugal, Slovenia, and Ireland, with Italian Prime Minister Giuseppe Conte leading the charge and urging that “Europe has to come up with an answer”, that the bloc should unleash its “full firepower”. Reticent and suspicious of the economic consequences of such a device, Germany, the Netherlands, Finland, and Austria, are all opposed to the concept of corona bonds. Informed by a deep-seated scepticism of sharing debt among member states, Germany and the Netherlands are leading these four nations in resisting Conte’s calls, preferring loans instead of financial transfers. The stakes within this debate are high, with each side attempting to diplomatically wrangle demands while tackling their own domestic consequences of the pandemic. How this micro-macro tension between member states and the bloc plays out will define the EU’s post-Covid response.
Part of Germany’s resistance to the debt mutualisation that Corona bonds would bring rests on the dismissal of a perceived spurious notion that community-wide, the EU is in support of a transfer union where the richest sacrifice for the poorest. This sentiment is present within Germany’s own borders: the Alternative for Deutschland party (AfD) has publicly spoken out against the issuance of Corona bonds, declaring that German taxpayers should not be held responsible for direct financial support other member-states.
Historically, Germany has continuously invoked the original terms of the Maastricht Treaty that specifically restricts debt-mutualisation. Instead, as was the case with their position during the eurozone crisis, they are calling for afflicted states to turn to the European Stability Mechanism (ESM).
There is concern between those who oppose Coronabonds that the movement towards shared debt could undermine the savings made by wealthier nations, therefore encouraging perceived fiscal mismanagement in recipient member-states. Expressive of this sentiment, though brazenly, was the comments made by Dutch finance minister Wopke Hoekstra, who suggested that Brussels should investigate states that had failed get their finances in order before the pandemic stuck.
Both Italy and Spain’s propose a "specifically designed and time limited" plan that would share the burden of debt across nations. Moreover, Conte has insisted that such mutualisation would not collectivise past or future debts and would be a temporary measure.
The ESM that Germany has suggested weaker economies apply through is much-maligned within Italy since the Eurozone crisis, a consequence of the mechanism’s strict conditionalities, requiring an adoption of austerity measures in the recipient nations which some have argued have directly affected responses to the pandemic. Indeed, some economists support Italy’s proposal partly on the basis that Germany’s advocacy of the ESM and its offer of a EUR 410 billion is insufficient to tackle the scope of the crisis.
Part of Italy’s argument rests upon an invocation of pathos, specifically the idea of European solidarity, with the Corona bonds case being such that it acts as proxy to a wider debate about pan European equality. In a position that refutes any northern accusations of financial negligence, Italy has staunchly objected that it should face potentially punitive terms for being afflicted by a crisis that was not their fault. They argue that if the rest of Europe learned from their knowledge accrued during their early outbreak, then why should there not be a reciprocal pooling of financial resources?
Covid-19 presents a Damoclean threat to the current political orders across the globe. From crisis to crisis, the pandemic only mounts further tension to a European bloc still reeling from the previous decade. Indeed, one can learn from this piece of recent history too. Economic instability, stringent austerity measures attached to financial rescue packages, the lingering of populist parties in the wings of government. Such was the atmosphere in the EU when the pandemic struck: one need only look to the discontent between members during the annual budgetary meeting earlier this year. Nation-bloc tensions run deep and are sown into the very institutions of the EU itself, Covid-19 shines a light on them. If economically vulnerable nations like Italy are left to financially fend for themselves or are forced into implementing austerity measures, this could have mortal consequences for the entirety of Europe.