One way or another, a Rubicon will have to be crossed
Can the European Union save itself? Yesterday, the FT published a chart that sums up the whole existential crisis. It shows all state aid approved by the EU during the Covid pandemic. Remarkably, just one country accounts for half of it: Germany.
Despite its comparatively light exposure to the virus, the strongest economy in the Union is getting the most help.
Most of this is self-funded, but there are obvious consequences for European solidarity. What makes the situation all the more intolerable is that the constraints of Eurozone membership prevent the weaker economies from helping themselves. There are limits on what they can borrow; they can’t make their own decisions on monetary measures like quantitative easing; and they can’t export their way to recovery through currency devaluation. Even the safety valve of sending their unemployed to find jobs elsewhere in Europe is subject to the effects and after-effects of lockdown.
The single currency was already sucking the life out of the Italian and other economies, but Covid has accelerated the process. Some sort of EU-wide rescue fund is desperately needed, but how to raise the money?
Eurobonds — i.e. debt raised by the European Central Bank and shared by the Eurozone members — was the big idea, but the Germans squashed it.
There is an alternative, however: Get the European Commission to borrow hundreds of billions of euros and dish it out. According to the FT’s correspondents, Ursula von der Leyen, the Commission president, was leading the charge. Except now Angela Merkel and Emmanuel Macron have stepped in to make the idea their own. Their proposal is for a €500 billion recovery fund, borrowed from the money markets and eventually repaid from the EU budget.
The European Commission, which oversees the budget would become a major borrower and a deficit spender — which is hugely significant, because that is how a real government operates as opposed to a quango limited to funds granted it by others.
Governments are only able to borrow vast amounts at affordable rates because they have the ability to service and repay their debts. The Merkel-Macron plan entails the European Commission acquiring that ability.
But how? Well, it could reduce spending on its normal budget priorities (farm subsidies, structural funds etc), but net recipient nations wouldn’t like that. Or it could demand a bigger budget, but net contributor nations would object. Alternatively, it could raise its own revenues through EU-wide taxes, but that’s another giant leap towards fiscal integration. The last resort would be getting the European Central Bank to basically print money on its behalf, but that’s illegal under EU treaties.
One way or another, a Rubicon will have to be crossed.
Given the depth of the current crisis and the size of the Italian and other distressed economies, €500 billion is unlikely to be enough. It is, enough, however, to turn the European Commission into a de facto EU government.
A problem caused by the single currency is thus eroding the sovereignty of EU nations whether or not they’re members of the Eurozone.