On April 10, after three days of difficult negotiations at the Eurogroup of Euro Area finance ministers, a deal was reached on the measures to address the economic consequences of the coronavirus pandemic. For Southern European countries, the agreement is a serious political defeat. For Europe as a whole, the agreement is a setback for the possibilities of keeping the European political project alive.
The Eurogroup final document on the economic policy response to the Covid-19 pandemic identifies three financing instruments and includes the promise of a recovery plan – yet to be written. The former include the SURE instrument, addressing sudden increases in public expenditure for the preservation of employment; new financing for companies from the European Investment Bank (EIB); access to European Stability Mechanism (ESM) credit lines to meet healthcare costs alone, without conditionality concerning macroeconomic and budgetary policies. Together, these instruments provide €540 billion, between 3 and 4% of the European Union GDP. According to the European Central Bank, this is about a third of the resources which would be necessary to face the coronavirus crisis – €1,500 billion.
The Eurogroup failed to agree on the introduction of Eurobonds, based on a mutual responsibility of EU countries in raising financial resources to address the common pandemic crisis. In their place, the Eurogroup announced the establishment of a temporary ‘Recovery Fund’, ‘targeted and commensurate with the extraordinary costs of the current crisis’. It should mobilise resources for an additional €500 billion – though this amount has not been specified yet. It will be up to the European Council – with the heads of governments - to discuss the ‘legal and practical aspects of such a fund, including its relationship with the EU budget’ and ‘its sources of financing’. For its financing, the document announces ‘innovative financial instruments, consistent with EU Treaties’. A vague wording for the reality of the refusal of any debt sharing. The hard line position of the Netherlands and Germany won the day. For Italy and Southern Europe, strong advocates of the introduction of Eurobonds, this has been a heavy defeat.
The Eurogroup policy response provides inadequate resources. First, the strengthening of EIB lending provides 200 billion of financing for companies with a focus on smaller firms. It will be based on a European guarantee fund of €25 billion, following the model of the Juncker plan on public investment. These are minor resources compared to the size of the guarantee funds offered in these weeks by many European governments to national firms.
Second, SURE (Support to mitigate Unemployment Risks in an Emergency) is a temporary loan-based instrument for financial assistance supporting Member States to protect employment in the Covid-19 crisis. It is based on a voluntary guarantee fund mainly financed by Member States, allowing the European Commission to grant loans of up to €100 billion to finance short-time work schemes for workers hit by the crisis. SURE has two weaknesses: first, it is based on Member countries’ guarantees; the amount and the timing of the resources available are uncertain; second, it plans to guarantee €10 billion loans per year for all 27 EU countries – far too few resources to face a crisis that, according to the ILO, will lead to ‘devastating’ losses in working hours and employment. In Italy, the government decree of March 2020 – the first one facing the coronavirus crisis -has financed workers’ protection schemes for €3.2 billion.
Lastly, the ESM credit lines will be provided without any conditionality to support ‘domestic financing of direct and indirect healthcare, cure and prevention related costs due to the Covid-19 crisis’. The maximum available resources amount to €240 billion (out of €410 billion of the ESM budget). However, its architecture makes the ESM an unsuitable instrument to face this emergency: it is based on a long procedure that requires regular assessments led by the European Commission and the European Council on government debt, and on the renewal of credit lines.
In addition, the Eurogroup document states that when the crisis ends, “euro area Member States would remain committed to strengthen economic and financial fundamentals, consistent with EU economic and fiscal coordination and surveillance frameworks, including any flexibility applied by the competent EU institutions”. In this way, ESM conditionality based on macroeconomic adjustment programmes exits the door, but re-enters from the window. For Italy, ESM resources available could amount to €36 billion, again – a small part only of the anti-coronavirus government effort; the first measures of the Italian government amounted to about €50 billion; new policies are likely to double the amount.
Back to austerity
However, access to ESM credit lines is not the real issue – Italy and Spain have already declared that they will not use it. Because of the lack of a common fiscal policy, a fundamental role is still played by the European Central Bank (ECB), whose expansion of the monetary base contains the rise in interest rate spreads on public bonds, and allows Member States more fiscal policy space. However, as countries have different fiscal capacities, the asymmetry in the ability to face the economic and social consequences of the crisis is likely to widen, further deepening the divide between Northern and Southern Europe. Once the worst of the crisis is over, the latter countries will be asked – by European authorities as well as by financial markets – to adjust public finances which will then have much higher public debt to GDP ratios. In the face of growing social distress caused by the coronavirus emergency, a pressure to return to austerity policies – as in the years after the 2008 crisis – would have dramatic social and political consequences.
The creation of Eurobonds is crucial because they are the main tool that could avoid such widening asymmetries. The prospect of a European ‘Recovery Fund’ will have to be clarified at the European Council meeting scheduled for April 23. So far there is no information on its size; the idea of €500 billion is inadequate, especially with a prolonged lockdown of economic activities. How will the Fund be financed? How will funds be distributed among countries? What will be the role of resources from the 2021-2027 Multiannual Financial Framework, considering the current European inability to agree on a common budget that is just 1% of GDP? Will the ‘Recovery Fund’ – eventually – emit European bonds? Will these bonds be purchased directly by the ECB, adding to European economic policy a crucial tool that all other world Central Banks regularly use? Will the EIB play a role in the ‘Recovery Fund’? How long will it take to implement these actions?
A key policy challenge for Europe is how to finance the real economy without putting too much pressure on fragile national public budgets. The Bank of England has just decided to directly finance the English Treasury. The US Federal Reserve is massively buying US Treasury bills. In Europe the obvious solution would be the creation of Eurobonds and the possibility for the ECB to directly buy them.
Another possibility is to assign a greater role to the European Investment Bank (EIB), with the ECB directly buying its bonds associated to the recovery programme. The role of the EIB within the EU has changed over time, from fostering regional development in poor areas in the 1950s and 1960s, to the promotion of energy independence in the 1970s, to a role in the liberalization and privatization policies in the 1980s and 1990s, through investment in cross-border infrastructural projects. It has developed a wide range of competences and tools based on partnerships between public institutions and private actors that enable it to effectively operate in financial markets. In a recent article in Industrial and Corporate Change we have pointed out that EIB actions are too similar to those of private investors; its guidelines make it difficult to invest in public goods and in activities characterised by high technological and market uncertainties. An evolution of the EIB towards a role of European public bank would make it possible for the EIB to support the post-pandemic recovery, and play a role in a new industrial policy, reshaping economic activities in Europe.
Reducing structural imbalances
A quantum leap in Europe’s economic policy capabilities is crucial to address the current emergency – discussed in a previous article here. Action is needed also to meet the challenge of a new international order with changing power relations between Europe, the US and China. Europe urgently needs to develop a strong fiscal policy capacity, to coordinate monetary and fiscal actions, to link recovery efforts to a European-level industrial policy targeted to the reconstruction of sustainable economic activities, reducing structural imbalances among European countries. We should not forget how much the 2008 crisis has deepened disparities in Europe; today GDP per capita in Italy is 5 percentage points below the 2008 level; Spain is 4 points above, France 7, Germany 10. Only a major policy change in these three directions could give a new meaning to the European project.
Some changes in European views are taking place. On the Eurobond proposal, a coalition of Southern countries, France, Belgium, Ireland and other governments has emerged. Within the German government and public opinion some openings are now visible. There is a need for greater cooperation among ‘peripheral’ countries and ‘variable geometry’ initiatives in economic policy, including ‘enhanced cooperation’ agreements in a variety of fields, replacing the immobility of a Europe ruled by a ‘Franco-German axis’. The political lessons to be learned are evident, but no clear political leadership is emerging for making Europe change its course.
Extreme right nationalism
In August 2011, the outgoing ECB President Jean Claude Trichet and the new one, Mario Draghi, sent a letter to the Prime Minister of the centre-right Italian government, Silvio Berlusconi, suggesting a set of economic policies that could respond to growing concern of financial markets on the sustainability of Italy’s public finances. They asked for austerity, privatization of public services, a weakening of collective wage bargaining, greater labour market flexibility, a reform of the pension system. This neoliberal plan was partially put in place by the ‘national unity’ government of Mario Monti, who replaced Berlusconi a few months later. Those measures have proved deeply harmful for the country’s economy (including the lack of reduction in the debt to GDP ratio), and have caused a major political upheaval, with the rise of the Five Stars Movement and the emergence of the Lega as a large, extreme-right, nationalist party. This time – in Italy as in many European countries - the dangers of extreme-right nationalism are much greater.
We told you so
In spring 2012, in the wake of the sovereign debt crisis, in Italy the Sbilanciamoci! Campaign launched a European debate on ‘Another road for Europe’, hosted by openDemocracy. Looking back at that discussion, the failure of Europe to take another direction has had major consequences on Europe’s long economic stagnation, political upheavals, national fragmentation – including Brexit. This time – with more than 60,000 deaths from the pandemic – Europe can hardly afford another failure to change.