The virus outbreak is exposing cracks in the foundation of Europe’s 21-year-old shared currency and festering animosities among its members, even as governments struggle to come up with a unified response where success or failure could mark the continent’s politics for years to come.
Divisions between north and south, unhealed wounds from the 2010-2015 debt crisis and enforced budget austerity, as well as the lack of a powerful central treasury are haunting governments as they try to find a way to keep the economy afloat without blowing up national coffers.
Finance ministers from the 19 countries that use the euro will debate the issue in a teleconference Tuesday, following up on a conference two weeks ago that broke up without a strong signal of solidarity. A key point of dispute was the proposal by Italy, France, Spain and six other countries for a one-time plan to borrow together to ensure favorable terms and avoid trouble down the road for individual member countries. The so-called frugal four to the north however – Germany, Finland, Austria and the Netherlands – balked.
The idea for shared borrowing came up but was rejected during the 2010-2015 crisis over high public debt that saw Greece, Ireland, Portugal, Spain and Cyprus bailed out by the other members. The appeal of the proposal is that countries can borrow more cheaply together, as the likelihood that the money will not be repaid is low.
The bonds could also be repaid over long periods of time, such as 10, 20, or 30 years. That reduces the chance of a financial crunch for any one country later on. Some proposals envisage raising money that would be lent to countries and have to be paid back; others would more fully share the burden, perhaps with a caveat that some of the spending would go to projects benefiting all nations.
The regional divisions over the bonds loosely follow a fault line from the debt crisis, in which indebted countries largely in southern Europe appealed for help. They got it, but under tough conditions – usually punishing levels of government budget cuts that resulted in lower pensions, salaries and growth.
That formula of help with strings attached created popular resentment and was based on the principle that bailing out bad behavior without corrective action only encourages more bad behavior. Northern European countries fear their taxpayers will be put on the hook for mismanagement elsewhere. Yet economists and analysts say the current crisis is different, since the virus is not the fault of any member country.
The heated back and forth underlines that membership in the euro, originally billed as a unifier when it was founded in 1999, can also lead to deep conflict.
Spanish Prime Minister Pedro Sanchez wrote in an op-ed that “the credibility of the European project will be severely damaged” without common debt.
Italy’s Prime Minister Giuseppe Conte said on Germany’s ARD television that Europe must react as a bloc competing with China and the United States, which has approved a large stimulus package. “In Europe, what do we want to do? Every member state wants to go it alone? If the reaction is not cohesive, vigorous and coordinated, Europe will continue to be less competitive, also in the global market,” Conte said.
So far no agreement is in the offing. Instead, the eurozone finance ministers will discuss a three-pillar aid package Tuesday, according to Mario Centeno, the Portuguese official who chairs eurozone finance meetings. That includes up to 240 billion euros ($264 billion) in loans from the eurozone’s bailout fund, the European Stability Mechanism; short-term credit to keep companies afloat; and a scheme to help companies avoid firing people. The EU has also suspended limits on government deficits and anti-trust rules against governments supporting their own companies – unprecedented steps for the bloc.
Yet the half-trillion-euro package under discussion would not cover the 1 trillion euros ($1.1 trillion) or more in public debt that could be created as a devastating recession destroys businesses and tax revenue.
So far, there has been a patchwork response from European governments, with differing amounts of firepower. Germany has led with a package of tax breaks, credit guarantees, and help for small businesses that could run to over 30% of GDP.
National debt piles could rise sharply because of the outbreak. Italy, which teetered on the edge of financial collapse in 2011, could see debt rise from 135% of GDP to as much as 189%, according to a worst-case scenario from Berenberg bank.
For now, a program by the European Central Bank to buy 870 billion euros ($960 billion) in bonds has defused concerns by holding down governments’ public borrowing rates. But that support is temporary and limited in size. If that remains the case, says, Berenberg economist Florian Hense, “market concerns over debt sustainability of some sovereigns, especially Italy, could resurface again.”
As well, Italy and others resist the idea of tapping the European Stability Mechanism as it carries a stigma of failure, since it was originally designed for countries that had run into financial trouble by themselves and were willing to sign written promises to shape up.
That raises the spectre of the heavy austerity imposed on Greece after its bailouts. Germany’s foreign and finance minister tried to assuage such concerns, saying in an op-ed in European newspapers that the ESM could lend with tailored conditions and no enforcement committee of outside officials like the one that was bitterly resented by Greeks.
The wrestling over the coronavirus response underlines the eurozone’s lack of a central treasury. While there is a EU budget, it is focused on agricultural subsidies and longer-term infrastructure projects, making it less useful as a rapid response stimulus. It is also only about 1% of EU GDP. France has pushed for an EU-level fund, but it remains tiny and focused on long-term investment – again, thanks to resistance from Germany and like-minded countries.
“If ever there was a time for solidarity in Europe, it is now,” said Berenberg economist Hense. “Whether or not Europeans help each other in this acute emergency can shape perceptions of what Europe stands for – and for a long time to come.”