EU in search of compromise to avoid economic crisis

By Christian Lequesne Source:Global Times Published: 2020/4/27 13:58:40

File photo shows European Commission President Ursula von der Leyen (L) reacting at a press conference on EU's response to COVID-19 at the EU Emergency Response Coordination Centre in Brussels, Belgium, March 2, 2020. Photo:Xinhua

The COVID-19 has become a real test of Europe's solidarity, as all countries are concerned with overcoming the pandemic and the economic consequences. Medical solidarity works well. Several infected people have been transferred and treated in hospitals of other states than theirs. Most economic activities in the EU have stopped since March, and this will require financial support from the national budgets for firms and unemployed workers. Nowhere in the world, have citizens been so highly supported by the state during the COVID-19 crisis as in Europe. This is the consequence of a long tradition of the welfare state, which has no counterpart in the US. 

The power of the national economies is not the same in all EU member states. Some states, such as Germany, have surpluses in their national budget and are even able to reduce their public debt. Other countries, like France and Italy, have fewer financial resources and were already carrying huge public debts (100 percent of the GDP in France, 136 percent of the GDP in Italy). COVID-19 will increase the public debt of these countries and risk remains high for an economic crisis similar to the one Europe experienced in 2009.

This explains why the southern member states of the EU as Italy and Spain, but also France, asked for a European Recovery Plan consisting injecting money into national economies. EU governments agreed to this in principle, but are having difficulty deciding on the right financial instruments to use. There is a north-south split on the issue and finding a compromise appears difficulty.

The northern member states of the EU would prefer to use existing tools, such as the European Stability Mechanism, loans from the European Investment Bank and the purchase of public debt by the European Central Bank. An initial agreement on an aid package already includes a trillion euros, of which 750 billion euros will go to the European Central Bank to purchase of sovereign debt. 

The southern member states want to go further and have a more ambitious recovery plan consisting of borrowing money on the financial markets and sharing that debt between the member states. This is not acceptable to northern countries, including Germany, the Netherlands, Austria and Finland.

The question is, will the northern and southern member states of the EU be able to overcome their differences and find a compromise? The EU Commission was asked on Thursday to make proposals. Time is running out because the economic difficulties will remain when the lockdown ends. The interdependence of markets in the EU is so strong that an economic crisis will affect all countries in the bloc. This is why many experts in Europe are seeking a recovery plan with some conditions in the use of money. The Italian Prime Minister Paulo Conte is resisting the idea of having conditions because the far-right party La Lega party will immediately accuse him of selling national sovereignty. Italy is by tradition a very Europhile country but less than 50 percent of Italians see now the EU as a positive organization. 

As usual in the EU, the compromise will depend on what big member states are prepared to agree, especially Germany. More than ever, German Chancellor Angela Merkel has the key of a European compromise in her hands. Her domestic management of COVID-19 was quite successful. There have been four times fewer deaths in Germany than in France, Italy and the UK. Merkel understands that something has to be done to avoid the EU falling into a deep crisis. It is a question of solidarity but also self-interest. German industry will suffer from a large economic crisis in the EU. Merkel will probably support her former minister, Ursula Von der Leyen, who is President of the EU Commission, to propose a linkage between a recovery plan and the new EU budgetary framework for the period 2021-2027. This would allow the EU Commission to be the borrower on the financial markets and not member states, which seems more acceptable to Germany. Macron's France will accept such a compromise which could be implemented this summer.   

The author is professor of political science in Sciences Po, Paris and a leading expert on EU politics.

Posted in: VIEWPOINT

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