After tense negotiations, members of the Eurozone finally clinched an economic package on April 10 to tackle the fallout of the Covid-19 crisis, which will cut an estimated 7 to 8 percent from the European Union’s GDP. Despite the well-publicized acrimony among EU leaders and an all too vague statement about a future recovery fund, the package offers strong measures: €100 billion ($109 billion) in unemployment reinsurance, €200 billion ($217 billion) in loans for cash-strapped companies, and credit lines worth up to 2 percent of Eurozone members’ GDP (for a total of €240 billion or $260 billion) for health-care-related costs—without conditionality.
However, these measures were overshadowed by the debate around so-called “coronabonds,” a form of debt mutualization among Eurozone members. This debate is symptomatic of the lack of a proper fiscal union within the European Union and of successive crises with faulty institutional patch-ups. It is also a hangover from the 2011-2012 sovereign debt crisis, during which the debate among member states on whether to pool debt or reform struggling economies was never resolved.
This two-part commentary argues that the bloc will only exit the cycle of doomsday pronouncements over its future when member states show a genuine willingness to address the institutional and political shortcomings that have hampered effective economic action at the EU level. This first part of the series details the unstable ground upon which member states are making decisions today, which rests upon three main issues: fiscal, institutional, and political.
By thinking of these three components as blocks that were slowly removed from the foundations of the edifice of the European Union, member states can start working on plugging those holes, avoid the same debate when the recovery fund is negotiated, and give new meaning to “solidarity.”
Fiscal: An Incomplete Economic Union
The European and Monetary Union remains incomplete. The Eurozone itself—dating back to its inception and the Maastricht Treaty—was built upon less than sturdy foundations due to the failure to establish a fiscal union to complement the unified monetary policy, inadequate crisis management tools, and flouted criteria to join the common currency. These structural and technical problems were then compounded by the response to the financial crisis in 2011-2012, with rescue instruments and efforts that were “only partly coherent, certainly incomplete and possibly ineffective.”
Indeed, the means to address economic shocks on the scale of the Covid-19 crisis are spread out among EU institutions and member states, making the patchwork of solutions and oversight complex and unstable. For example, the European Central Bank (ECB) can stabilize debt markets, but national governments still issue their own debt. Some observers have argued that risks in the European Central Bank’s portfolio are already partially shared and that the bank faces market-pricing risks that a common debt agency would not, thus mooting the current debate.
Another shortcoming in the fiscal space is the lack of a common budget to support economic cohesion and counter-economic shocks. Eurozone members did make some moves toward a common budget in 2019 with the awkwardly-named Budgetary Instrument for Competitiveness and Convergence (BICC), which is meant to support economic coordination and structural reforms across the euro area. However, its financing remains unclear, as it is tied to the currently stalled negotiations for the next EU budget and will depend on Eurozone members’ willingness to contribute. Absent a common budget and centralized economic decisionmaking body, along the lines of a dedicated ministry, the completion of a true economic and fiscal zone that would complement the monetary union and limit economic disparities across members remains a far-off prospect.
Institutional: Between Consensus and Unanimity—Brussels and the Member States
The challenges of reaching a compromise are also rooted in the European Union’s institutional evolution. Since the late-1990s, tense summits have led to new treaties barely scratching the surface of necessary reforms for an expanding European Union. The Lisbon Treaty clarified the EU institutional structure, with more competences being held at the EU level and more decisions taken by a majority rather than by unanimity. Yet the Eurozone crisis quickly dissipated this optimism, and over the last few years, the tension between federal and intergovernmental decisionmaking has grown under pressure from more assertive member states.
Indeed, the evolution of the bloc between a technocratic one and a union of members dedicated to its ideals, both the sum of its parts and more, means tensions remain over responsibility between the institutions and the member states. While the original small-step, technocratic method of pooling economic resources has remained a powerful driver of EU action, it can also make institutions resistant to political appeals (such as stronger solidarity to deliver peace and prosperity). Though there has been a push since Lisbon for a values-based approach in the institutional structure, it has been slower to develop despite the rhetoric of an increasingly political or “geopolitical” European Union. Unfortunately, the institutional structure began to evolve in the way many had hoped (e.g., streamlining competences, consensus-based decisions founded on political or value considerations) just as the domestic political side in some corners has evolved away from consensus and supranational delegation. Furthermore, the repeated use of unanimity in decisionmaking means a slower process that is subject to domestic political considerations—not inherently bad since it protects a variety of interests but problematic in crisis time. The result is faltering credibility for EU institutions that appear unable to respond to the expectations placed upon them.
The Covid-19 debate is no different: the European Union and the leaders of its institutions have tools at their disposal that were bestowed upon them by member states in treaties, but these tools can only be triggered with and their breadth defined by the approval of member states. Thus, member states blame Brussels for its lack of action, but they are the ones placing limits on this action. Because of this structure, EU solidarity only goes as far as member states allow it.
Political: Sovereignty and Political Grievances
The issue of fiscal solidarity, and solidarity in the service of the European Union’s aims more broadly, inevitably brings up political questions among member states. This is no more true than when it affects the sovereign control of the purse strings, particularly as different member states integrated the European Union with widely different fiscal theories and policies. States have legitimate national interests and visions of the European construction they defend, but they can also be too fixed in the belief that what is good for their country is good for all EU member states. For example, if one member state refuses to pool resources unless and until it can dictate to another how its finances should be handled, it seems only fair the debate should be broadened to include all manners of detrimental fiscal practices. Furthermore, choosing the short-term domestic political interest can harm long-term stabilization, which heightens the risks of recurring economic shocks.
Debates over economic tools have also been highly tense in part because member states have attached certain values and political significance (to say nothing of stereotypes) to technocratic solutions and economic preferences (e.g., conditionality, supervision criteria), which is understandable from a domestic political perspective. (This goes for both sides of the argument.) Ironically, some national leaders latch onto such debates by, for example, using European Stabilisation Mechanism (ESM) conditions as symbols of their grievances—be it the lack of support from other member states or their accused profligacy—but it is doubtful their publics think in those terms; in the end, solidarity conveyed in the broadest terms possible, particularly when people are dying, is the most potent kind. The conditions imposed on some member states deepen the sense of distrust and the risk of populist appeals, as they are given no guarantee that the spending they need to get out of this crisis—a crisis that was not of their own making—will not be held against them as yet another sign of their fiscal extravagance. But these countries must also understand the worries of other member states that are protecting legitimate national interests; the pooling of resources without conditions can also stoke populist sentiment in other member states (e.g., Germany). Germany’s softening position within the Eurogroup, or at least more forceful search for a compromise, and France’s offer to consider pooled debt with a smaller group of member states show some leaders understand the political necessity to showcase solidarity in crisis time.
Addressing Structural Issues to Strengthen Solidarity
The Covid-19 crisis is exposing the confluence of technical, institutional, and political failures that have hindered the European Union’s effectiveness and expression of solidarity for years, if not decades. Entrenched orthodoxies have impeded a fast response at the European level and will inevitably resurface when the time comes to discuss the common recovery fund that finance ministers have floated.
Instead, member states must show a willingness to fix and get past the structural and political weaknesses of the Eurozone and the European Union’s economic configuration. This means using all tools available under the treaties, leveraging cohesion to prevent the crisis from worsening existing inequities and imbalances, and defending the values laid out in treaties.
Additionally, any discussion on the future of the European Union should address the structural issues that impede fiscal and economic solidarity, considering, for example, a true common budget and centralized power over this budget (including someone serving as economy minister of sorts). This structural debate should also clarify where competencies lie, and member states, through the European Council, should relinquish unanimity decisionmaking to streamline crisis measures and prevent unnecessary stalling. Doing this within current treaty boundaries is all the more important because the current political situation prevents treaty changes.
The response to this once-in-a-century crisis will shape the European Union for years to come and either strengthen it or cripple its credibility in the eyes of its citizens. EU and national leaders must understand this to prevent the latter scenario from materializing. As Albert Einstein said, “we cannot solve our problems with the same thinking that created them.” Political decisions were made that created the complex and unstable construction we see today in the European Union, in full display amid the Covid-19 crisis. Member states and EU leaders must conjure up new political thinking to solve this crisis.
Donatienne Ruy is an associate fellow with the Europe Program at the Center for Strategic and International Studies in Washington, D.C.
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