No EU-nity: The European Union is failing to deal with its economic challenges
June 4, 2020
2 min read
What's going on here?
The ongoing global coronavirus crisis has not only created an economic crisis in Europe but also laid bare the political and constitutional difficulties facing the union.
What does this mean?
This crisis is testing the EU from the wavering commitment of member states to the political project, to the single currency between them and the laws upon which the EU is founded.
On 18 May 2020, Germany and France proposed a €500bn European recovery fund in an attempt to solve the ongoing economic crisis as a result of the coronavirus. The fund aimed to aid states who have been badly hit by coronavirus, including Italy and Spain. Although the fund would not need to be repaid, member states who contribute larger sums to the EU budget would be responsible for coughing up the cash – €135bn in Germany’s case. This plan has since been rejected by Austria, Holland, Denmark and Sweden – “the Frugal Four”- who demand that the money comes in the form of loans rather than grants. This avoids the fund becoming “a debt union through the back door”, as put by Sebastian Kurz, the Austrian Chancellor. This is also known as mutualised debt where all member states acquire debt as a collective even if they have not accessed the fund.
What's the big picture effect?
The EU’s economic crisis was evident before the coronavirus crisis began, with the bloc suffering a GDP contraction of 3.5%. However, further economic problems have arisen as a result of the coronavirus crisis and seemingly stem from the single currency – the Euro.
For Germany and France who entered the crisis with little debt, borrowing €9bn to bail out Lufthansa or providing an €8bn loan to Renault is unlikely to result in unsustainable debt levels. However, in Italy, where public debt totalled €2.4trn before the crisis, more borrowing will result in unmaintainable debt. This means Italian companies are currently receiving smaller bailouts than their German and French counterparts.
The Merkel Macron plan was welcomed by Southern states including Italy. Yet the Frugal Four argue for temporary emergency funds based on sympathetic loans, avoiding further debt mutualisation.
The Euro was adopted to promote political integration, but some integration enthusiasts are describing this as the EU’s “Hamilton moment” – a reference to the US revolutionary’s decision to federalise the debts of U.S. states, leading to a union. This is not a new concept; the federalisation of Europe was also discussed in the fallout of the 2008 economic crisis.
Earlier this month the German courts struck a further blow for fiscal integration by questioning a European Court of Justice judgement which permitted the European Bank to buy member states’ public debt to shore up the euro.
The EU has weathered many crises, and many have predicted its breakup before. But without debt mutualisation, northern EU nations who entered the coronavirus crisis with stronger public finances will support their businesses, whilst southern states with higher debts cannot. As southern businesses struggle to compete with larger northern state-supported rivals, the benefit of being a part of the single market vanishes. Once this becomes disadvantageous, nations may start to leave the EU.
Report written by Michael Johnson
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