A battle for the future of Europe
The struggle to pay the costs of the coronavirus crisis has exacerbated long-standing tensions about the EU’s budget. Failure to compromise could be disastrous for the bloc’s survival.
What’s happened?
The coronavirus pandemic has widened the EU’s north-south divisions at a time when discord and fractures were already bursting into the open. Brexit means that EU states were already struggling to agree a fair long-term budget for the next seven years, a period that even before the pandemic looked set to be marked by major, potentially divisive, challenges. These include tackling the climate crisis, developing Europe’s poorer regions, dealing with the fraying of democracy in Hungary and Poland and finding the money to carry on subsidising farmers through the Common Agricultural Policy.
In late February a summit of EU leaders – called to work out how to bridge the €75bn gap in the bloc’s budget due to the UK’s departure – collapsed in embarrassing acrimony. Four member states known as the “frugals” – the Netherlands, Denmark, Austria and Sweden – insisted that the EU budget must amount to no more than 1% of the bloc’s gross national income. Germany, the biggest contributor to the budget, backed them.
What’s at stake now?
Conceivably, the whole future of the EU – and we are approaching what French president Emmanuel Macron has called a “moment of truth”. Is European solidarity real, or just a convenient myth? If the EU can’t take strong, unified action to help its weaker members in the face of a global emergency, then what’s it for? Although it’s not yet possible to predict the scale or length of the Covid-19 recession, it is clear it will be savage. Unemployment in many countries could double; whole swathes of industry could collapse. So the decisions taken over the next few weeks are likely to shape the whole idea of European unity.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
And what’s been decided so far?
Staggeringly little. Over the past month, in a series of inconclusive and sometimes fractious summits (held by video conference) EU leaders have struggled to make common cause and put off key decisions. In a nutshell, a group of mostly northern countries (led by the Netherlands and including Germany and Sweden) are highly sceptical about making financial transfers or grants to the worst-affected southern countries. But France has backed Spain and Italy in backing €1.5trn in grants funded by new borrowing.
This geographic divide echoes the long-running tug of war in the EU between countries favouring jointly issued EU bonds (now rechristened “corona bonds”) and those against. Macron argues that the scale of the present crisis makes transfers and corona bonds necessary, and says that “Europe has no future if we cannot find a response to this exceptional shock”. But the Dutch in particular, supported by German chancellor Angela Merkel, strongly disagree and have nixed the idea.
What firefighting has the EU done?
Last week EU leaders finally approved a €540bn rescue package that had been put together by finance ministers a fortnight previously. The package includes funding for health expenditure via the European Stability Mechanism, loans for businesses from the European Investment Bank and €100bn for the European Commission’s unemployment fund.
But even if you take the €540bn at face value – and some argue it vastly over-inflates the real picture – the deal amounts to an “admission of European incapacity”, argues Adam Tooze, professor of history at Columbia University, on Social Europe. “In light of the trillion-dollar hit to the global economy, its modest dimensions amount to an admission that priority in crisis-fighting remains with the nation-states.”
Is this an existential crisis for the EU?
It could be if the economic emergency becomes a political one, which is why the current wrangling over debt mechanisms is so important. “The depth of the crash and its repercussions in the political sphere will be decided to a significant degree by the nature and range of spending in the immediate months and years,” says Daniel Boffey in The Guardian – and by who controls the necessary borrowing.
If member states try and tackle this crisis through national borrowing alone, it is “possible, even probable, that the debt accrued by the least productive economies will come to be seen as unsustainable by the markets”, says Boffey. “Economies could slide into despair, risking further joblessness, hunger, destitution.” The likes of Italy could be looking at a triple whammy of economic meltdown, sovereign debt crisis and political breakdown.
What’s the EU doing to avert that?
Printing money, in the form of the European Central Bank’s (ECB) “pandemic emergency purchase programme”. In addition to the rescue package, the ECB decided last month to buy extra state bonds this year to the tune of €750m – an act of solidarity that lets Italy and others borrow much more cheaply than they would otherwise be able to.
And the European Commission is working on further financial support – possibly in excess of a trillion euros – to be unveiled as part of its upcoming multiannual financial framework (a seven-year budget) by mid-May. Yet all that might not be enough to stave off a wider European crisis – especially if the economic damage wreaked by Covid-19 is even more widespread.
What could happen?
A 10% fall in eurozone GDP looks likely this year, says Wolfgang Munchau in the Financial Times, with Italy and Spain hit harder than average and taking longer to recover. As Italy’s debt-to-GDP surges from 135% to (say) 180%, bond markets will start to question its solvency. It is then perfectly plausible that a future government led by Matteo Salvini (of the far-right Lega party) “might be tempted to default on Italy’s debt” – with disastrous effects for the future of the euro and the EU.
Sign up to Money Morning
Our team, led by award winning editors, is dedicated to delivering you the top news, analysis, and guides to help you manage your money, grow your investments and build wealth.
Simon Wilson’s first career was in book publishing, as an economics editor at Routledge, and as a publisher of non-fiction at Random House, specialising in popular business and management books. While there, he published Customers.com, a bestselling classic of the early days of e-commerce, and The Money or Your Life: Reuniting Work and Joy, an inspirational book that helped inspire its publisher towards a post-corporate, portfolio life.
Since 2001, he has been a writer for MoneyWeek, a financial copywriter, and a long-time contributing editor at The Week. Simon also works as an actor and corporate trainer; current and past clients include investment banks, the Bank of England, the UK government, several Magic Circle law firms and all of the Big Four accountancy firms. He has a degree in languages (German and Spanish) and social and political sciences from the University of Cambridge.
-
8 of the best properties for sale near ski slopes
The best properties for sale near ski slopes – from a luxury cabin in Geilo, one of Norway’s premier ski resorts, to a large chalet in Valais, Switzerland
By Natasha Langan Published
-
Cash hoarders take total UK savings to £2 trillion – why aren’t we investing?
Investment-shy Brits are hoarding huge amounts of cash in their savings accounts. We look at the case for saving versus investing.
By Katie Williams Published
-
UK wages grow at a record pace
The latest UK wages data will add pressure on the BoE to push interest rates even higher.
By Nicole García Mérida Published
-
Trapped in a time of zombie government
It’s not just companies that are eking out an existence, says Max King. The state is in the twilight zone too.
By Max King Published
-
America is in deep denial over debt
The downgrade in America’s credit rating was much criticised by the US government, says Alex Rankine. But was it a long time coming?
By Alex Rankine Published
-
UK economy avoids stagnation with surprise growth
Gross domestic product increased by 0.2% in the second quarter and by 0.5% in June
By Pedro Gonçalves Published
-
Bank of England raises interest rates to 5.25%
The Bank has hiked rates from 5% to 5.25%, marking the 14th increase in a row. We explain what it means for savers and homeowners - and whether more rate rises are on the horizon
By Ruth Emery Published
-
UK wage growth hits a record high
Stubborn inflation fuels wage growth, hitting a 20-year record high. But unemployment jumps
By Vaishali Varu Published
-
UK inflation remains at 8.7% ‒ what it means for your money
Inflation was unmoved at 8.7% in the 12 months to May. What does this ‘sticky’ rate of inflation mean for your money?
By John Fitzsimons Published
-
VICE bankruptcy: how did it happen?
Was the VICE bankruptcy inevitable? We look into how the once multibillion-dollar came crashing down.
By Jane Lewis Published