The pandemic exposes deep divides in Europe

By Felix Zadek-Ewing April 30, 2020 9:42 am

EU Commission President Ursula von der Leyen faces her biggest challenge yet: to initiate plans to incorporate a large and unprecedented fund into the EU budget to revive the economy amidst a global pandemic which has ripped through Europe, ruining lives and economies swiftly and ruthlessly.

One of the greatest difficulties of creating a strategy will be bridging the North-South divide, with EU Member States already arguing over how to tackle the economic fallout. While some of the biggest economies in Europe, such as Italy, Spain, France and some other EU states, want to share out coronavirus-incurred debt, which would be paid off by all EU nations, other key member states such as Germany and the Netherlands, which got into the crisis later and have not seen the same levels of deaths or economic devastation, have not yet agreed to help to bail out their European neighbours in the South.

This conflict is not, however, a recent phenomenon. The North-South divide dates back to 2007, when some EU Member States received bail outs following the recession and had a difficult process of recovery, and a lack of solidarity in the EU has continued to emerge throughout the migrant crisis. But the institution of the EU relies on interlinked economies to support one another and to avoid systemic failure.

So, is there a way out of the crisis?

Coronabonds

A potential solution comes in the form of Coronabonds. These would make up new funding to counter the economic fallout of the Covid-19 pandemic, backed by nine Member States on sharing the costs of the recovery. A small group including Germany, the Netherlands, Austria and Finland are against them. Germany instead wants to set up an EU rescue fund and lend using mechanisms set up during the financial crisis of a decade ago.

Issuing common bonds to EU Members States is not a novel idea. For years some economists have urged the Eurozone to address the structural fragility that the euro crisis exposed. But Member States, mainly in northern Europe, argue that they cannot be responsible for bailing out other countries during these fragile times. Furthermore, critics point towards the example of Greece and the EU’s mistakes in handling the country’s bailout, resulting, very slowly, in a weak recovery for the economy.

French Finance Minister Bruno Le Maire is demanding a fund worth “several hundred billion euros” in joint borrowing to finance economic recovery. But Austria, Denmark, Finland and the Netherlands have refused to back joint borrowing, anxious that they could be liable for repaying the debts of other members states

What now?

To compromise, von der Leyen has proposed that countries raise the amounts of which they are capable in order to contribute to the long-term budget, which is known as the Multiannual Financial Framework (MFF).  An agreement on the MFF will not be easy and the pressure is mounting to adapt the framework. Some have criticised von der Leyen, arguing that she is overly deferential to national leaders, such as Angela Merkel, and too cautious of upsetting the member states, rather than using the Commission as a political platform.

The EU will most likely agree on economic support through the usual channels, rather than through new mechanism such as Coronabonds. Some have argued that the EU is stronger than ever at the moment, demonstrating solidarity and support during these unprecedented times, after a turbulent period triggered by Brexit.  However, the political crisis emerging as a result of the crisis, highlighting deep divisions and differences between EU member states, may prove more difficult to erase than just debt.

The multilingual Whitehouse team are experts in politics and policy development across the European Union, providing political consultancy and public affairs advice to a wide range of clients. More information about our European experience can be found here ad more about our Brexit experience can be found here, or, if you have any questions, please contact our European Director, Viviana Spaghetti, at viviana.spaghetti@whitehouseconsulting.co.uk.

By Felix Zadek-Ewing April 30, 2020 9:42 am

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