BY KEITH JOHNSON
Anasty North-South divide is tearing Europe apart over the question of how to respond to the economic wreckage of the coronavirus pandemic, conjuring up the worst days of the 2008 financial crisis and the European Union’s subsequent near-death experience.
At issue is how countries can respond to the unprecedented economic toll wrought by the pandemic and the near-total national lockdowns needed to contain the spread of the virus. Over the weekend, Spain put its entire economy, already wheezing, into hibernation, while Italy has extended its lockdown and France is running at two-thirds capacity. Governments need to find hundreds of billions, if not trillions, of euros to pay idled workers, maintain overworked health care systems, and kindle what they hope will be a recovery in the second half of the year.
Countries in Southern Europe, led by France, Spain, and Italy, have called for a common European response to the challenge—such as a massive “eurobond” underwritten by richer and less rich countries alike to better share the pain. Even Christine Lagarde, the head of the European Central Bank (ECB), has called for Europe to step up and do what it’s never done before. But countries in the North, led by Germany and the Netherlands, have balked at the idea of a eurobond, which they say is a nonstarter because it would mean their own taxpayers would be on the hook for countries they say have long lived beyond their means.
The stakes are huge. In the short term, many heavily indebted countries in Southern Europe have to deal with an economic collapse on a scale never before seen, with nearly all businesses shuttered by government order, while borrowing costs are higher than in richer countries like Germany, which limits those governments’ ability to respond to the crisis. In the longer term, what Southern Europeans see as a lack of solidarity from Germans and Dutch threatens to torpedo the entire notion of the European Union, which has been tottering since at least the last financial crisis.
The debate is in some ways a retread of the Greek crisis of 2011-2012 and the subsequent fallout, when similarly existential issues arose over the different economic habits of Northern and Southern European countries. But this time, thousands of lives are at stake.
“I was never a fan of the doomsayers who always predicted the end of the eurozone, but this is the first time that I am starting to feel myself that there is a real danger,” said Ángel Talavera, the head of Europe at Oxford Economics. “If the debate becomes ‘Europe isn’t helping while people are dying in droves,’ I really fear that is going to cause permanent damage to the European project.”
There are still almost two weeks for European finance ministers to gin up a solution, and a common response isn’t impossible, even if politically unpalatable for many countries. For years, many Europeans have yearned to make the euro-cemented monetary union a compact by creating a true fiscal union—as in the United States, where places as disparate as New York and Mississippi share a common currency, and where wealthier parts of the bloc underwrite the prosperity of those left behind. That’s the fight that’s currently brewing in Europe.
What France and other countries are calling for is the issue of “coronabonds” or something similar: a jointly issued bond that would raise a huge, perhaps trillion-euro common fund of money for all European countries using the impeccable credit rating of the best. It’s a little like a cash-strapped youth asking a parent with sterling credit to co-sign a loan—not to buy a car but rather to fight the plague.
Still, some question whether it’s really necessary. The ECB rolled out its own heavy artillery recently, offering a 750 billion euro program to underwrite debt from European countries in a deliberate bid to keep borrowing costs for beleaguered countries like Italy and Spain as low as possible. And it has worked—the spread on Italy’s long-term bonds compared with Germany’s gold-plated debt is still low and just a fraction of what it was during the worst of the last financial crisis.
“I think the whole eurobond discussion is a bit of a distraction—it’s not needed, and you already have all the tools you could wish for. You could do national stimulus,” said Claus Vistesen, the chief eurozone economist at Pantheon Macroeconomics.
Still, given the politics of the crisis, he said such a move would make sense, even if national governments seemingly have room now to borrow on their own. Even a handful of German economists have called for a joint response.
“Deficit rules are gone, the ECB is buying bonds to protect spreads—all sorts of sacred cows have been slaughtered, so why not think about mutual bonds?” Vistesen said.
“Deficit rules are gone, the ECB is buying bonds to protect spreads—all sorts of sacred cows have been slaughtered, so why not think about mutual bonds?” Vistesen said.
Instead, Dutch and German leaders suggest that other existing tools could do the job just as well or better than going down what they see as a slippery slope of fiscal union by issuing a common bond. The European Stability Mechanism (ESM), a kind of joint insurance policy for the whole eurozone, has more than 400 billion euros on hand to help out countries in crisis. The Dutch are leery of even breaking that glass, seeing it as a last resort for an emergency, while Southern Europe fears the emergency claxons sounded two weeks ago.
But even the full ESM would provide just a tiny injection—something on the order of loans of 2 percent of any country’s GDP, while this crisis requires wartime responses that are tenfold larger. The United States, for example, just passed a rescue package north of $2 trillion, or about 10 percent of its economy. What’s more, tapping the ESM comes with strings attached and the stigma of having pulled the fire alarm for what amounts to little aid.
“Italy wouldn’t accept it. That would come to a total of about $35 billion, with a reduction in the interest rate that is absolutely useless,” said Grégory Claeys of Bruegel, a Brussels-based think tank. “The argument is the same as last time—that those countries are fiscally profligate, though I thought it was clear to everyone that this is an exogenous shock,” stemming from the unforeseen virus, not an overly generous welfare state, he said.
Joint European action may be a lost cause at any rate. While France, Spain, and Italy are clamoring for support, the Germans and Dutch are digging in. German Finance Minister Olaf Scholz said Sunday that eurobonds are not the answer, while Dutch Prime Minister Mark Rutte said: “I cannot foresee any circumstances in which the Netherlands will accept Eurobonds.”
The danger isn’t just how countries will pay to undo for the short-term damage. The larger question is what happens to Europe, which was already strained to the breaking point during the aftermath of the financial crisis, with lingering resentment from countries like Greece and Italy toward countries like Germany. The coronavirus and its aftermath threaten a hammer blow on those existing fissures.
On the one hand, this crisis is different from 2012—major economies, not just Greece, are going cap in hand to Brussels and Berlin.
On the one hand, this crisis is different from 2012—major economies, not just Greece, are going cap in hand to Brussels and Berlin.
“Last time, it was Greece against Germany. This time, some of the biggest economies are clamoring for this,” said Claeys of Bruegel. Also, he said, unlike last time, European institutions are offering help, in the form of ECB intervention, and looser budget rules.
If Northern European countries maintain their current reluctance to use measures that could help the rest of the EU, that could further embolden populists, like former Deputy Prime Minister Matteo Salvini in Italy, who has long warred with Brussels. Spain, which has a pro-European government, barely fended off a big surge of right-wing extremist votes in the last election.
On the other hand, if the crisis forces the hand of countries like Germany and the Netherlands and ends up launching a jointly financed temporary relief program, that could lay the groundwork for a revolutionary fiscal union within Europe. The firehouse could become the foundation for a new Europe—if it doesn’t burn down first.
“The problem is, it’s extremely binary, and it’s hard to say which is more likely,” Talavera said.
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