An extended March 26 meeting of the European Council failed to reach agreement on which economic tool the European Union (EU) should deploy to combat what is predicted to be a severe recession caused by the coronavirus pandemic, instead kicking the can down the road for a further two weeks.
With the coronavirus pandemic triggering a human and economic crisis worldwide, and panicked lockdowns in member states grinding economic gears to a halt, the European economy sits on the verge of a depression and total shutdown. National governments across the EU took the lead in combating the virus, closing borders and businesses, and in some cases with significant spending programmes to protect workers, jobs and businesses from the resulting downturn. As appeals by Italy for urgent assistance went unheeded by all but China and Cuba, and it was beginning to look like “European solidarity” was an idea for fairer weather.
Playing catch-up, the European Commission muscled-in on border closures, while on March 12 the European Central Bank (ECB) announced an initial €120 billion package aimed at ongoing liquidity in the financial and banking sector. A further 37 billion was mobilised from existing EU funds, but it was soon obvious that the disaster posed a threat of several magnitudes greater than anticipated.
The ECB openly called for massive government intervention in order to stave off a deep recession, and on March 18 announced its “bazooka” response – a €750 billion bond purchase package named the “Pandemic Emergency Purchase Programme” (PEPP) – allowing a rapid expansion of public debt to facilitate spending on this scale.
The PEPP, in action since March 26, allows the ECB (and national central banks) to buy large amounts of government and corporate debt until the end of the year, a practice known as Quantitative Easing (QE), to keep the money flowing. State aid rules have also been loosened to enable heavy national spending to combat downturn and the pandemic.
The terms of the PEPP are significantly more flexible than previous rounds of QE. Crucially, it is accompanied by the activation of the “general escape clause” from the European Union’s Stability and Growth Pact – a mechanism imposing the straight-jacket of austerity on the eurozone, curtailing national spending with restrictive debt ceilings. Despite initial reticence from Germany and the Netherlands, the existing cap limiting the purchase of national debt to 33% has also been temporarily lifted, Greek government debt is to be included, and the ECB will target short-term debt maturing in as little as 70 days.
The ECB’s move – while unprecedented and welcome – is nonetheless insufficient. The global economy was already heading into a downturn when the coronavirus crisis tipped it over a cliff, reaching deep into the productive sector of the economy, with the financial sector amplifying the impacts. The PEPP still places limits on debt purchases and debts will still be allocated by the “capital key” of national central banks. Concerns also remain about what the short duration of the PEPP will mean for national debt levels in EU member states, and their capacity to service increased debt while still spending heavily on fighting a recession next year.
A March 24 Eurogroup meeting of the eurozone’s finance ministers on the creation of a “pandemic crisis support” tool to lead the EU response in the longer term failed to reach agreement. The teleconference focused largely on how to use the existing European Stability Mechanism (ESM), the EU’s 410 billion euro bailout fund, to offer loans to eurozone members. Several countries, including Italy and Spain, remained sceptical of using the mechanism, which brings both austere “conditionalities” and the dangerous stigma of association with bailouts during the last financial crisis.
As an alternative, they proposed creating a common debt instrument in the form of special eurozone bonds – “eurobonds” or “coronabonds.” Such eurobonds would share the debt and associated risk across the eurozone, allowing greater levels of borrowing and spending by national governments. EU member states would thereby share the debt incurred in preventing an economic meltdown, in a way that countries spending heavily to avert the crisis are not punished for it later by having to repay enormous debts under onerous conditions.
A more fiscally conservative bloc, led again by Germany and the Netherlands, remained opposed to the use of eurobonds. Among other things, issuing eurobonds would send a strong signal about the willingness of member states to complete the “monetary union,” deepening European integration by sharing national debt burdens at a European level throughout the eurozone. While arguably necessary for the long-term survival of the euro project, northern countries like Germany and the Netherlands remain less than willing to pay for supposedly profligate spending by the likes of Spain, Italy and Greece without being able to impose structural changes on those economies.
Undeterred, on March 25, the leaders of nine eurozone countries – France, Italy, Spain, Portugal, Belgium, Luxembourg, Spain, Greece, Slovenia and Ireland – sent a letter to the President of the European Council calling for the creation of just such a mechanism. Current ECB president Christine Lagarde and her predecessor Mario Draghi, along with European Parliament President David Sassoli, trade union leaders and numerous economists, have also lent their support to such an idea.
Supporters of eurobonds argue that the coronavirus crisis is ideal for using eurobonds, as it is a textbook example of what economists call an “exogenous shock.” In particular, this means that the “moral hazard” argument against eurobonds – of not rewarding bad behaviour and giving irresponsible governments access to cheap credit – doesn’t apply. There is no such risk in helping Italy or Spain combat the coronavirus by running up huge deficits to avoid deaths and recession, as no one “blames” Italy or Spain for this crisis the way Greece was blamed for theirs. It is difficult to moralise during a pandemic.
Difficult, but not impossible. The bloc led by Germany, Netherlands, Finland and Austria maintained their objection to the issuance of “coronabonds” in the March 26 European Council. The Council meeting dragged on for hours as leaders of the 27 EU member states re-drafted their joint communique and then re-drafted it again, in a protracted struggle over the wording of one paragraph in particular.
The summit had begun with a fiscally cautious draft declaration that was limited to announcing a future “roadmap for an action plan” to restore the European economy, with the only concrete measure an emergency credit line from the ESM. Italian Prime Minister Giuseppe Conte refused to sign up for an instrument designed for a debt crisis, however, and along with Spain demanded a more serious and comprehensive solution to be presented within 10 days.
In the end, the outcome was a fudge, with little of susbtance agreed. When a final text of the communique emerged, Italy and Spain had succeeded in removing reference to the ESM, while their suggestion that the EU’s ‘five presidents’ – heads of the European Council, Commission, Parliament, ECB and Eurogroup – meet to formulate a response was converted into a “consultation” between the presidents of the Council and Commission and the various EU institutions. The timeframe for a response was extended from 10 days to two weeks.
Proponents of eurobonds insisted afterwards that their option was still on the table, while opponents insisted that, despite not being in the text, the ESM was the only game in town. Immediately after the summit, Merkel made it clear that for Germany, the ESM and its credit lines, and not coronabonds, is the option on the table. “The ESM is the preferred instrument,” she said. Dutch Prime Minister Mark Rutte was equally firm: “I cannot foresee any circumstances in which the Netherlands will accept eurobonds.”
Tensions were further heightened when Portugal’s Prime Minister António Costa responded to comments made earlier in the week by Dutch finance minister Wopke Hoekstra, suggesting that Spain and other countries be investigated for not having the budgetary capacity to deal with the pandemic given the past seven years of “growth” in the eurozone. After the council meeting, Costa lashed out at these comments, describing them as “repulsive” and “senseless,” and warning that this “recurring pettiness threatens the future of the EU.”
For countries such as Portugal, the final communique was “manifestly insufficient,” and it was certainly light years from the urgent Marshall Plan of coordinated eurozone spending Spain’s Prime Minister Sanchez had called for in the “war against the coronavirus.” The group including France, Spain, Italy and Portugal represents nearly half of the EU population, the clear majority of eurozone public debt, and is that part of the EU hardest hit by the coronavirus crisis.
As the brutal impact of this crisis spreads through the EU, the attitude of currently less-impacted countries is likely to change – whether they do so in time to avert disaster is an unanswered question. The long-term economic effects of the coronavirus pandemic can’t be predicted, but they threaten a maelstrom of recession significantly worse than what followed the 2007-2008 financial crisis.
Meanwhile, the suspension of the Stability and Growth Pact, and the encouragement for national governments to spend heavily to avert crisis, temporarily softens the EU’s damaging obsession with austerity, allowing states to intervene in and bring crucial sectors – such as healthcare – back under public control, while protecting jobs and incomes.
It is clear, however, that many other economic and political taboos remain to be broken in order to deal with the looming crisis in a way that protects citizens, democracy and the climate, rather than just the euro and the banks. If the EU fails to provide the framework, Italy and other member states may feel compelled to act independently.