Pandemic Invades Body of European Union

A woman walks over a bridge with the European Central Bank in the background in Frankfurt, Germany, on Monday. (AP Photo/Michael Probst)

(CN) — The coronavirus pandemic is not just infecting hundreds of thousands of Europeans — it’s also attacking the pulmonary system of Europe’s politics and economies and badly sickening the European Union, a massive but fragile experiment in multinational democracy and borderless landscapes where people and goods move with few restraints.

The big political problem is economic: How is Europe going to overcome the gigantic economic toll this pandemic is wreaking on European economies, some of the world’s largest?

A foretaste of the damage came on Wednesday when the European Trade Union Confederation announced 1 million people had lost their jobs in the EU in the past two weeks. Recession, shuttered shops and businesses, sagging inflation and rising unemployment are now inevitable, economists warn.

Behind the dramatic deaths of more than 30,000 Europeans and scenes of a desolate and traumatized continent, a nasty fight has erupted inside Europe over whether the coming avalanche of new debt countries will need to take on should be shared across the EU or left up to each nation to handle on its own.

At its core, it’s an argument about whether Germany and the Netherlands, Europe’s financially stronger countries, should help bail out financially weaker countries — Italy, Spain, France, Greece, among others.

But this fight isn’t just about credit, debt, euros, interest rates, maturities, guarantees – the stuff of accounting and balance sheets. It’s a fight that dredges up historical grievances between north and south and sparks simmering national hostilities on a continent still riven by rivalry, discord and bigotry.

“This is in many ways an existential debate for the whole of Europe,” said Erik Jones, a professor of European studies and international political economy at the Johns Hopkins School of Advanced International Studies in Italy.

The debate comes down to a proposal made by Italian Prime Minister Giuseppe Conte to issue government bonds at the EU level to allow countries like his borrow money at the lowest possible interest rates and with favorable conditions. It’s a strategy where government bonds are backed by the EU as a whole, allowing each borrower to benefit from the powerful credit rating of countries such as Germany and the Netherlands.

His proposal was quickly backed by eight other EU countries in southern and eastern Europe and now it’s supported by 14 of the 19 nations that use the euro as currency, the so-called eurozone.

But Conte’s plan hit a brick wall: Politicians in the Netherlands and Germany see this as a scheme by other countries to burden them with debt.

“Corona bonds? Never!” Dutch Prime Minister Mark Rutte reportedly said during a teleconference with other EU leaders.

Later, in talking with reporters, the Dutch leader said he could not “foresee any circumstances in which the Netherlands will accept Eurobonds.”

His use of the term Eurobonds refers to pleas European nations such as Italy made for a similar program of EU-level bonds to get over the sovereign debt crisis following the 2008 financial meltdown. But Eurobonds weren’t issued then and instead countries like Italy, Greece and Spain were forced into years of budget cuts to reduce their debts and borrow money on the international market at high prices. Now, with the virus ravaging Europe, many point to those budget cuts as having seriously damaged Europe’s health care systems and set it up for failure in this health crisis. 

The Netherlands’ tough position — despite the catastrophic circumstances – is also backed by Germany, Finland and Austria, a group known as the “frugal four.” The small island nation of Malta has not taken a position.

A child walks on the deserted Republique square in Paris on Wednesday. (AP Photo/Thibault Camus)

Making the fight worse, Dutch Finance Minister Wopke Hoekstra reportedly suggested during a teleconference with other EU leaders and ministers that countries like Spain should be investigated for not building up a rainy-day fund to handle a crisis.

This sparked a furious response. Portugal’s Prime Minister Antonio Costa called Hoekstra’s comments “repugnant,” “small-minded” and “a threat to the EU’s future.”

The so-called frugal four argue that countries in need of loans can tap into a financial instrument the EU set up to bail out troubled economies – something called the European Stability Mechanism, or ESM. But tapping money under this formula brings with it tough conditions, perhaps forcing a borrower country to cut public services, privatize parts of its economy and take other steps to reduce its debt and pay off its loans, which could be paid in part by the International Monetary Fund. With such strict conditions attached, countries are loath to turn to the ESM.

“Winding through some European circles is the idea that Italy will end up cornered and be forced to accept what it has always refused: a rescue by the International Monetary Fund or the European institutions,” wrote Federico Fubini, a columnist for the Corriere della Sera newspaper.

As the EU’s leaders lock horns, it remains unclear what path will be taken. EU finance ministers are expected to meet on April 7 and seek to formulate a plan.

The repercussions from a decision on how Europe pays for this crisis may be profound, with many experts and politicians warning the future of the EU project is at stake.

“We are in a unique historical moment for the European Union which must once again decide what its identity and reason for being are,” said economist Tammaro Terracciano in Il Sole 24, an Italian business newspaper.

He warned that if the northern countries refuse to back the concept of the so-called corona bonds then the “entire European project is at risk of collapsing.”

“Without more integration and risk sharing, countries like Italy risk falling into an even greater crisis with disastrous consequences for Europe’s economy,” Terracciano said. “In the worst of cases, we risk default [on Italy’s debt], which could easily bring about the destruction of Europe as we know it.”

The cost of overcoming the economic shock from the pandemic will be staggering. The $2.2 trillion stimulus package signed by U.S. President Donald Trump illustrates the magnitude of the catastrophe.

As yet, the EU has not drawn up a similar response even though the EU’s economy, made up of 27 member states in a single market, rivals the U.S. economy in size and strength.

For now, individual countries are pushing ahead with multibillion-dollar recovery packages to help businesses stay afloat, pay unemployed workers, cover the escalating costs of fighting the virus and keep public services running. The European Central Bank has also stepped up to help with various stimulus measures.

But issuing EU-wide bonds is seen as the best way for heavily indebted countries like Italy to get access to credit from the international market without incurring huge borrowing costs.

In theory, these bonds would cover only new debt nations rack up to pay for this crisis and past debt would not be rolled into the new loans. This, in theory, limits the risk these bonds pose to the EU as a whole and to creditors such as Germany and the Netherlands.  

“It’s kind of like free money to pay for the crisis,” said Jones, the economics professor at Johns Hopkins, in an online video.

Jones said the problem facing EU countries on both sides of the argument is not so much a financial one but a political quandary aggravated by the fact that much of Europe is led by weak governments under threat from a growing wave of nationalist and anti-EU political forces.

On the one side, if the moderate and conservative governments of Germany and the Netherlands give in and back bailing out southern countries, they face being criticized by rivals on the right for putting their domestic economies at risk and bailing out feckless southern countries.

“They can’t be seen as soft on fiscal irresponsibility and encouraging moral hazard that will grow in the future,” Jones said.

To the right of Germany’s ruling coalition of Christian Democrats and Social Democrats is the Alternative for Germany, a far-right nationalist party growing in support even as some of its members espouse what critics call neo-Nazi language and symbolism. The AfD sees the corona bonds as bailing out southern economies.

Paintings of footprints are displayed for social distancing in a bakery in Paris on Tuesday. (AP Photo/Francois Mori)

On the other side, if Spain and Italy are forced to tap into funds provided by the European Stability Mechanism and the International Monetary Fund, their center-left ruling governments would be blasted for accepting a harsh economic straitjacket imposed by international lenders, Jones said.

Jones said the governments in Spain and Italy likely would not survive if they accept such poisonous terms. Italy’s ruling coalition is under threat from the far-right League party led by Matteo Salvini.

In recent weeks, with Italy falling into despair over the coronavirus outbreak and EU leaders squabbling over how to respond to the crisis, Salvini has begun to lash out at Germany and the EU, even calling for Italy to leave the bloc in a so-called “Italexit.”

This new crisis — and a perception that Germany lacks compassion and is selfishly looking after its own interests — is fueling resentment in Italy, the EU’s third largest economy since the United Kingdom left the bloc.

Many Italians feel the EU, and in particular Germany’s powerful Chancellor Angela Merkel, has abandoned them at their moments of need after the 2008 financial crisis and when Italy became a main port of entry for hundreds of thousands of refugees and asylum seekers.

Adding to the resentment is a sense that Germany and the Netherlands have gained economically and politically under the EU’s system of open borders and level-playing field rules that favor exports and large corporations. The Netherlands is also accused of sucking tax dollars out of other EU nations by acting as a tax haven.

Italy, meanwhile, has suffered rising unemployment, crippling government debt, the loss of companies and its young people emigrating in large numbers.

Italians are upset that Germany has appeared unwilling to help them again at this moment of extreme crisis. At the outset of the coronavirus outbreak, Germany banned medical equipment from being exported, a move that infuriated Italy’s government. 

It didn’t help that China, Russia and Cuba sent in doctors, equipment and supplies after Italy’s outbreak began while Austria closed its borders to Italy and Germany stopped protective equipment shipments. Germany is now transporting some Italian patients to its hospitals.

Now, as German, Austrian and Dutch leaders balk at backing EU-wide bonds, many Italians feel unfairly treated.

Calls for boycotting German products are circulating in Italy. One boycott calls on Italians to “crash the revenues of German and Austrian companies” and support Italian companies. A list of German companies to boycott — everything from Bayer, the pill maker, to Puma shoes — follows.

Jones said the EU, for its own survival, needs to back the position of Italy and allow for the issuance of corona bonds.

“Solidarity is the only solution because without that solidarity things are likely to fall apart,” he said.

There may be growing support in the Netherlands and Germany too for a EU-wide bond plan.

On a recent television interview, Gert-Jan Segers, the leader of ChristenUnie, a Dutch party in the governing coalition, said a “Marshall plan” for the south was necessary. He was echoing the words of Spanish Prime Minister Pedro Sanchez, who’d also called on Europe to enact a rebuilding plan like the one that revived the continent following World War II.

Conte, the Italian prime minister, sees the question of how to pay for this disaster as crucial to the future of the EU.

“It is time to introduce a common European debt tool that allows us to overcome this war as soon as possible and relaunch the economy,” Conte said in a recent interview with El Pais, a Spanish newspaper. “If the EU does not live up to its vocation and its role in this historical situation, will citizens have more confidence in it or will they permanently lose it?”

“The risk is obvious,” Conte continued. “Nationalist instincts in Italy, but also in Spain and elsewhere, will be much stronger if Europe is not up to the task.”

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Courthouse News reporters Cain Burdeau and Molly Quell are based in the European Union.

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