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.

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. 

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