Economic recovery: lessons from the past for Europe’s future

As EU member states start to come out of lockdown, Europe is looking to the future beyond COVID-19.

In the last week of April, the EU flagged a €2 trillion reconstruction fund to finance Europe’s recovery. The exact shape of this response is unclear, and whether it will help resolve deep, historic tensions between Europe’s prosperous north and poorer south remains uncertain.

This followed calls from Italy, Spain, France and six other member states to finance recovery using so-called ‘corona bonds’: a form of mutualised debt, issued by the European Investment Bank, which would be shared by all EU member states. States like Italy and Spain, already heavily in debt and hardest hit by COVID-19, called for corona bonds as an act of solidarity from their neighbours, relieving the south of some of the economic burden that will follow the immediate health crisis.

Richer, northern European nations opposed the idea, led by the Netherlands, on the basis that their finances should not be used to prop up another nation’s response to the crisis. The Netherlands, and others, insisted that states draw on the European Stability Mechanism (ESM) to finance their recoveries. Germany’s resistance to debt mutualisation was decisive in ensuring corona bonds were taken off the table during negotiations of the ‘Eurogroup’ of EU Finance Ministers at the end of March.

Instead, the €540 million deal announced on 9 April set up several, interim measures ahead of the long-term EU recovery fund. This included a European Investment Bank fund of €200 billion, accessible to companies hit by the health crisis and a €100 billion commitment from the European Commission towards jobless reinsurance. It also made loans of up to two per cent of any member state’s economic output available under the ESM to cover emergency health costs.

Use of the ESM raises controversies and stirs old grievances within the EU. Italy and Spain remember how, in the Eurozone Crisis of 2010-2012, the strict conditions for structural reform attached to the ESM were used to set up a punitive regime of austerity in Greece. This time around, very few are openly contemplating austerity economics as a recovery tool. But the 9 April agreement’s vague language committing states using the ESM to ‘strengthen economic and financial fundamentals’ does little to ease southern states’ scepticism.

For them, the EU’s economic response is a test of both European solidarity, and their own divided politics. In Italy, early missteps in the procurement of ventilators and PPE fed resentment against wealthy, northern European nations. Italian Prime Minister Giuseppe Conte knows that if his representations to the EU and other Member States are seen as weak, and if the EU is perceived as fiscally intransigent, then this may galvanise public opinion behind his hard-line Eurosceptic rival, Matteo Salvini.

By the end of April, it appeared some – including, crucially, German leaders – heeded these warnings. The reconstruction fund plan sets aside both corona bonds and the ESM. European Commission President Ursula Von Der Leyen has instead proposed using an increased EU budget to raise capital to finance member states’ recoveries. However, this still risks rehashing the debate over member state responsibilities to manage their own debt: should funds be issued to individual Member States in the form of grants, or loans; and, if loans, who is responsible for the debt incurred?

The economic response to COVID-19 has, far from the calls for ‘solidarity’, opened up divisions in the EU that go back not just to the 2010-2012 crisis, but the founding of the Eurozone in 1999. Lacking strong coordination of fiscal policy, among other things, growth in the common market strongly favours highly productive, export-oriented regions and member states, like Germany. For sceptics, this is the ‘original sin’ of the Eurozone, and the root cause of every European crisis.

Economic recovery across the EU will, certainly, require creativity, political will, and solidarity. Using recovery funds to boost productivity in struggling regions and nations is already being proposed as one way forward. Others have called for an emphasis on the environment in recovery policies, greater democratisation of EU institutions, or even full, fiscal union. For them, the question is existential: the alternative to a radical reimagining of the EU is the end of the European project.

05 May 2020

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Economic recovery: lessons from the past for Europe’s future