The Eurozone and the EU may have survived a sovereign debt crisis, a refugee crisis and Brexit most recently, but don’t be certain that the same could happen with COVID-19.
Having seen in the past the way that Eurozone has acted against financial challenges – reluctant to employ common fiscal policies to combat them – it’s plausible to see the future of the single currency and the EU at question once again.
As the coronavirus is set to cause an immerse economic downturn – even greater than that of 2008 – it will expose the structural problems of European institutions. And the current situation is more dangerous than previous crises.
ECB’s monetary policies are not going to be enough. Such an extreme economic shock requires a generous fiscal stimulus to support governments who in turn support people and firms at risk.
Accordingly, to avoid another long-term recession that could be fatal for the existence of the single currency, Germany and other North-European members need to abandon their economic dogmatism.
Fiscal expansion is vital
Governments are expected to face financial hardship as they will have to save businesses and support households through benefits, while tax revenues are declining. On this purpose, policymakers will have to employ pro-cyclical fiscal policies to keep firms and households afloat.
However, given the vulnerability of certain Eurozone economies due to high debt, there are only three ways to overcome this: scrap the limits of government bonds that the ECB can buy; second, effectively issuing new money to finance member states’ budget deficits, without governments taking up new debt; and third, issuing shared debt the so-called “corona-bonds” that will pool risk across Eurozone members.
However, the ECB’s power is very limited as any direct financial support to governments is illegal under its mandate, while flexibility of budget deficits is limited as well under EU rules. But what limits hope is the reluctance of certain Eurozone members – with Germany most prominently – to relax these rules.
More bad blood across Eurozone members
Germany’s decisions to ban exports of masks to all EU member states – to prevent its own shortage – is only the tip of the iceberg on growing tensions among EU members, along with the fact that Italy did not receive urgent medical supplies from any EU country.
The main source of tensions is that the more fiscally sound Eurozone countries still refuse to help highly-indebted countries even during these times.
In a recent teleconference, Chancellor Merkel refused to commit to the idea of a “corona-bond”, and it’s unlikely that the German parliament would approve such a “bold” measure as that idea remains an anathema for the country as well as for Austria and the Netherlands, who also opposed to the similar concept of “eurobonds” during the eurozone’s sovereign debt crisis. Even the existing financial support mechanism (ESM) for Eurozone members, which has EUR410bn of unused lending capacity, should not be seen to relax the acceptance of loan collaterals, as Dutch officials claimed. While the ECB, which is largely influenced by Budensbank, was even late to pursue a new asset purchase programme, with Christine Lagarde failing to set the right tone of “doing what it takes” to support its members.
The lack of EU’s solidarity will continue to feed anti-EU political movements in southern EU countries that feel left on their own, as it did with austerity during the sovereign debt crisis, and lack of aid during the refugee crisis.
If lessons are not learnt, they will be learnt the hard way
Unable to learn lessons and with no common political vision due to conflict of interests, European institutions could be the non-human victims of coronavirus.
If vulnerable Eurozone economies are left on their own, it is unlikely that they will be able to financially survive this crisis within the single currency; the far-fetched scenario of abandoning the single currency will become reality for those countries with large debts, in order to print their own money to survive.
Ultimately, being part of a union should offer to a country more than being its own; if the Eurozone, and extensively, the EU do not act as a union this time, they will have no reason to exist for some of its members.