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 the Eurozone has acted against financial challenges, reluctant to employ common fiscal policies to combat them, a question mark remains over the future of the single currency and the EU once again.
As the coronavirus is set to cause an immerse economic downturn – even greater than that of 2008 – it will likely expose the structural problems of European institutions, and the current situation is more dangerous than we’ve seen before.
The European Central Bank (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 businesses at risk.
Accordingly, to avoid another long-term recession that could be fatal for the single currency, Germany and other North European members need to abandon 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 businesses and households afloat.
However, given the vulnerability of certain Eurozone economies to high debt, only three options are possible to survive the crisis.
First, scrap the limits on government bonds that the ECB can buy; second, issue new money to finance member states’ budget deficits, without governments taking up new debt; and third, issue shared debt instruments, the so-called ‘corona-bonds’ to pool risk across Eurozone members.
However, the ECB’s power remains limited as any direct financial support to governments is illegal under its mandate, while any flexibility in budget deficits is also limited under EU rules.
But what limits hope is the reluctance of certain Eurozone members – with Germany most prominently – to relax these rules.
Eurozone bad blood
Germany’s decisions to ban exports of protective face 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 tension is that the more fiscally sound Eurozone countries still refuse to help highly-indebted countries, even during these times.
In a recent teleconference, German Chancellor Angela Merkel refused to commit to the idea of a “corona-bond”, and it is unlikely that the German Parliament would approve such a “bold” measure as that idea is an anathema for Germany, as well as for Austria and the Netherlands, who also opposed the idea of “Eurobonds” during the eurozone’s sovereign debt crisis.
Even the existing European stability mechanism (ESM) for Eurozone members, which has €410bn (£364bn) of unused lending capacity, is unlikely to ease the acceptance of loan collaterals, as Dutch officials claimed.
While the ECB – which is largely influenced by the Deutsche Bundesbank, the German central bank – was even late to pursue a new asset purchase programme, with ECB President Christine Lagarde failing to set the right tone of “doing what it takes” to support its members.
The lack of solidarity among EU member-states will continue to feed anti-EU political movements, particularly in southern EU countries that feel left out, as was the case with austerity during the sovereign debt crisis, and lack of aid during the refugee crisis.
Learning the hard way
An inability to learn lessons coupled with a lack of political vision, due to conflict of interests, could see European institutions become the non-human victims of coronavirus.
If vulnerable Eurozone economies are left on their own, it is unlikely that they will financially survive the crisis as members of the single currency; the seemingly far-fetched scenario of abandoning the single currency – to benefit from the printing of money – may become a reality for those countries with large debts.
Ultimately, being part of a union should bring wider benefits not possible as a single nation-state, if the Eurozone, and extensively, the EU does not act as a union this time, they will serve no purpose and have no reason to exist for some of its members.
Theo Delimaris is an associate research analyst for MarketLine