Economic reconstruction efforts in Europe could cost trillions but countries are at odds over how the plan will be funded.
(CN) — With their economies imploding and the future of the European Union at stake, European leaders on Thursday agreed to develop a massive recovery fund but deep differences remain between richer and poorer countries over how to pay for the economic catastrophe caused by the coronavirus pandemic.
With the pandemic raging in Europe and limiting travel, Europe’s heads of state met via teleconference to continue hammering out an economic reconstruction plan — what some European leaders say needs to be a new Marshall Plan, referring to the recovery led by the United States following World War II. Some leaders put a $1.6 trillion price tag on the plan.
“We’ve all called it the new Marshall Plan,” said David Sassoli, the president of the European Parliament. “But the big difference is that there will be no money from the outside. We must be the ones financing this new Marshall Plan.”
But whether the EU will be able to agree on who funds such an ambitious plan is far from clear. This disagreement is exposing old prejudices and differences between northern and southern Europeans and renewed debates over who benefits and who doesn’t in the EU, a unique transnational economic and political union.
With the economic catastrophe so bad, many fear the EU could unravel if the wrong steps are taken now in dealing with the pandemic.
“There is a real sense of urgency,” said Charles Michel, a former Belgian prime minister and president of the European Council, a body composed by the heads of EU member states.
The council did not agree on a concrete plan, but approved setting up a recovery fund under the European Commission, the EU’s executive body. The fund will provide a mix of loans and grants to member states delivered through the EU’s seven-year budget framework, officials said. The funds will be available to help broken economies but also push the EU’s goals to foster a greener economy and make the bloc more technologically advanced.
“We already know the scale, the speed and the impact of the economic crisis is unprecedented in modern times,” said Ursula von der Leyen, the head of the European Commission, at a news conference after the meeting.
“While the pandemic certainly knows no borders and is blind to nationalities, some countries are hit harder than others and unless we act decisively and collectively the recovery will not be symmetric and divergences between member states will increase,” she said.
In response to questions about whether the EU was acting quickly enough, she pointed out that EU states and institutions, such as the European Central Bank, already are tackling the economic catastrophe with $3.5 trillion in spending.
The fight between richer northern European countries and debt-ridden southern nations is wide-ranging but can be boiled down to whether the richer, industrialized and financially stronger north will open its purse strings to help struggling economies in the south.
Italy, Spain and France are leading calls for the EU to take on massive amounts of debt collectively as a bloc. Doing this is seen as critical in particular for Italy to prevent that heavily indebted country from potentially defaulting on its debt.
Italy has been hit the hardest by the pandemic while also being burdened by a public debt load equal to 130% of its gross domestic product, the second highest in Europe after Greece.
If it borrows money on its own to recover from the pandemic, it faces hefty borrowing costs. To avoid that, Italy and other countries want the EU as a whole to create a loan program. If the EU does this by issuing so-called “eurobonds” or “coronabonds,” then countries like Italy would have access to low-interest loans.
The problem is that richer northern countries – including Germany, the Netherlands, Austria and Finland – are opposed to this scheme because they fear they will end up having to pay for the loans issued to countries with less solid economies.
On Thursday, German Chancellor Angela Merkel again rejected the idea of coronabonds but said Germany was ready to spend a lot more on the EU budget to help the recovery.
The toll from lockdowns, closed borders and shutdown businesses is massive and rivaling the economic damage seen by the Great Depression of the 1930s, economists warn.
The EU’s economies are expected to contract by about 7.5% this year, according to the International Monetary Fund.
Europe’s automotive industry is steeling for a drop in demand of between 7% and 9% in its biggest markets. Plant nurseries in the Netherlands have watched sales sink by 70%. The textiles sector is expecting sales to decline by half. Millions are unemployed: In France, 4 million more people are getting unemployment benefits and the unemployment rate in Spain has hit 20%. The tourism industry is getting pummeled: Revenues for hotels and restaurants are off by 50% and 90% for ferry companies and airlines.
On Thursday, Italy released new figures that highlighted just how bad things have become there. It said 10 million more Italians are at risk of falling into poverty and that the country’s economic output this year is expected to drop by 8%, its budget deficit to soar to 10% and its public debt to grow to 155% of GDP. Italy’s economy has been largely stagnant for nearly two decades and its crippling public debt has forced it to impose severe cuts to services, raise taxes and sell off public assets. Also, EU budget rules have forced it to stay within spending limits that many economists say have been counterproductive and made its economic blues worse.
Von der Leyen said it was crucial that the EU step up and make sure that poorer countries don’t fall farther behind.
She said better-off countries are spending a lot more to save domestic businesses and that is putting other EU states at a competitive disadvantage. The EU limits how much states can spend in state aid on domestic companies but those restrictions have been lifted due to the pandemic. For example, Italy has nationalized the country’s main airline company, the struggling Alitalia.
“This difference will have a massive effect on the level playing field unless we counterbalance that,” she said.
Sassoli said the EU funds are needed also to make sure that European companies and assets are not sold off to “predatory” forces from outside the bloc.
“We are living in a moment of great fragility,” Sassoli said. “We need to protect Europe’s holdings against predatory forces.”
Courthouse News reporter Cain Burdeau is based in the European Union.