The coronavirus pandemic shocked the European economy and provoked a severe split in the European Union. The unity of the countries that together survived more than one crisis evaporated as soon as the conversation turned to finance the European reconstruction program. The rich states represented by Austria, the Netherlands, Denmark and Sweden forgot about European solidarity. It refused to treat Spain, Italy and other emerging countries of the union free of charge. The debate about who should pay hundreds of billions of euros for saving Europe has grown into a full-fledged political crisis that will either make the EU stronger or cease to exist in its current form. Vaccination against greed – in the material “Tapes.ru”.
The coronavirus pandemic was the most severe economic shock to Europe since the Great Depression of the 1930s. In just a few months, the infection spread to all countries of the region, 2.4 million people were infected. To contain the disease, the EU had to take restrictive measures unprecedented in terms of rigidity and virtually completely freeze the economy. Such actions, although they helped to stop the progress of the coronavirus, turned into serious problems for all European countries without exception. According to the forecast of the European Commission (EC), in the second quarter of 2020, European GDP will drop by 12.2 per cent compared to the first quarter, and by the end of 2020, it will lose 7.4 per cent. At the European Central Bank(ECB) do not exclude that the economy this year may lose all 12 per cent. For comparison: 12 years ago during the crisis of 2008-2009 (the Great Recession), European GDP dipped by only 4.5 per cent.
“Given the seriousness of the current unprecedented global shock, it is clear that the EU has faced the deepest economic downturn in its history. The projected drop in real annual GDP in 2020 will exceed the amplitude of the deepest recessions in EU history, including the first oil crisis (1973-1975) and the global financial crisis. However, there will still be less than the peak drop in the times of the Great Depression,” the report of the European Commission says.
The large-scale crisis required no less enthusiastic responses. The ECB has announced a broad program of quantitative easing (QE), which involves the purchase by national regulators of government and corporate bonds and filling the European economy with money. Initially, the program was supposed to be worth 750 billion euros, but due to the severity of the crisis, it was almost doubled, reaching 1.35 trillion. The scale of QE even caused a conflict between the ECB and the central bank of Germany. The latter, through the Constitutional Court of the Federal Republic of Germany, indicated that the actions of the European regulator are monetary financing prohibited by the EU (a situation where the Central Bank directly finances the budget deficit) and carries the risk of an explosion of inflation.
Also, in April, European countries agreed on an emergency loan program for 540 billion euros, which began to operate on June 1. Within its framework, the EC provided 100 billion to fight unemployment, the European Investment Bank gave 200 billion to lend to small and medium-sized businesses, and the European Stabilization Mechanism (EU Stabilization Fund) allocated 240 billion to lend to targeted health programs to combat the pandemic. An addition to the emergency plan was to be the launch of a long-term EU economic recovery program. This is a fund, from which money would be allocated to countries affected by a coronavirus. However, they still cannot agree on the terms of its launch, since it is not clear who will eventually have to pay the bill.
Rescue of the drowning
The central conflict arose between the relatively emerging countries of southern Europe and the prosperous economies of the north, whose citizens make the most extensive contributions to the European budget in terms of per capita. The first ones by 2020 were already weakened by the migration crisis, as well as the problems accumulated since the European debt crisis of the 2010s. So, at the end of 2019, Spain’s national debt amounted to 95.5 per cent of GDP, Portugal – 118 per cent, Italy – 135 per cent, Greece – 177 per cent. The obligations of the prosperous northern economies of Germany, Austria and the Netherlands were much more modest and fit within 50-70 per cent; by Denmark and Sweden, by the end of 2019, they were at the level of 33-35 per cent. According to EU rules, the public debt of European countries should not exceed 60 per cent of GDP and a budget deficit of three per cent.
With the onset of coronavirus, the situation in southern countries worsened. Firstly, they quickly became leaders in the region in terms of the number of infected people. Secondly, the southern states turned out to be more financially dependent on the collapsed tourism sector than the northern neighbours. As a result, the fall in GDP of Greece, Italy, and Spain is expected to be at the level of 9.4 to 9.7 per cent according to the effects of 2020; The GDP of Austria, the Netherlands, Germany, Denmark, and Sweden will drop between 5.5-6.8 per cent. The South made it clear that it could hardly survive the crisis without financial injections.
However, due to the already high level of public debt, states such as Italy and Spain do not seek to assume new obligations, the interest on which will be too high. Instead, the affected countries, in March, suggested the more affluent northern neighbours show Euro-solidarity and share responsibility for the restoration of the European economy. They asked the EC to issue the so-called corona bond. We are talking about Eurobonds, the debt on which will not be repaid by individual countries, but by all EU countries, both those entering the eurozone and those remaining outside it.
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Reproaches also reinforced the calls for Brussels that the EU did not do enough for the most affected states during the pandemic and left them without vital support. For example, the actions of Germany and France caused a severe resentment in the South, which at the very height of the epidemic introduced a temporary ban on the export of personal protective equipment. However, the governments of rich countries, which, even without the financial support of the EC, can find funds to lead their economies out of the crisis, have stated that they do not consider their citizens to be obliged to pay for the mistakes of politicians and the lack of budgetary discipline of EU partners. They expressed their readiness to support the affected states, not with grants, but with loans.
The debate about what the European recovery fund should look like lasted several months and only got off the ground in May when France and Germany tried to defuse the situation. Paris managed to entice Berlin, which was initially opposed to joint debt, to offer together500 billion euro three-year recovery plan. According to him, the entire amount should be borrowed in capital markets under EU guarantees and given to affected countries with grants in exchange for reforms. Another condition was the investment of the funds provided in a strictly limited range of industries, the development of which meets the long-term goals of the European Union. We are talking about areas such as the green and digital economies, science, healthcare development, and innovation. It was proposed to pay off the debt after 2027 from the EU budget, which is formed from the contributions of 27 EU states – that is, by the forces of the entire union.
Presenting their proposal for the establishment of the European Recovery Fund, France and Germany announced that the project was developed in “close cooperation” with representatives of the northern and southern blocs – the Netherlands and Italy. However, in the north, the proposal of Paris and Berlin was refused.” We are ready to help the countries most affected by the coronavirus, but only with loans,” said Austrian Chancellor Sebastian Kurtz after consulting with his “Lean Four” colleagues (as Austria, the Netherlands, Sweden and Denmark are called).
Bless and save
The long-awaited moment was the publication of the plan for economic recovery, developed by the European Commission. It was called the “EU of the new generation” and turned out to be more expensive than the idea of France and Germany. Brussels proposed borrowing € 750 billion in financial markets under EU guarantees. As in the Franco-German plan, they want to allocate 500 billion to the affected countries in the form of grants, another 250 billion pledged for loans. They intend to provide money through the mechanisms of the European budget; they will have to repay the borrowed funds in 2028-2058. If the plan is approved, the central part of the amount (40 per cent) will be received by only two countries – Spain and Italy, although all the states of the union will have to pay debts. So Rome will be able to count173 billion, including 82 billion in grants. Madrid will receive 140 billion, of which 77 will be given free of charge in exchange for reform.
Such a volume of general borrowing is unprecedented for the EU – in the past, the European Union more often issued securities worth several billion or even millions of euros. However, the current issue of bonds on behalf of the entire European Union will allow you to get money at the lowest possible percentage. The fact is that the EU has the highest credit rating (AAA). If, for example, Italy independently borrowed money in the financial market, the yield on its Eurobonds due to the unstable situation and problems in the economy would be high to justify the risk of investors.
The EC insists that in order to overcome the crisis, action must be taken quickly, and they called for a plan to be agreed at the level of Europe as early as July. However, the compromise option of the recovery fund has caused no less controversy than previous proposals. The Lean Four has once again stated that it insists on lending to the affected states. This time, Finland joined the bloc of Austria, the Netherlands, Denmark and Sweden. Helsinki, although they did not wholly disown the idea of joint borrowing under EU guarantees, suggested that the EC consider the possibility of borrowing a smaller amount, as well as change the proportions of grants and loans in the program in favour of increasing the share of the latter.
Another stumbling block was the question of to whom and in what proportion to give out money. In Brussels, it was proposed to provide them based on “pre-established distribution parameters, which include population, GDP per capita and the unemployment rate”. The EC statement was understood as follows: in order not to wait for the end of 2020 and objective data on how the coronavirus affected the economies of different countries, the old economic statistics should be used for calculations. As some states had severe problems before the pandemic, doubts arose about the reasonableness and fairness of such a distribution system. For example, in Greece and Spain, unemployment by January 2020 was above 16 and 13 per cent, respectively, and in Sweden, which refused quarantine and suffered severely from a pandemic, it was 7 per cent. The third problem that critics of the Brussels version of the plan pointed out was the lack of a system for tracking the targeted use of funds. In the past, there were precedents when states did not spend money allocated by the European Commission for declared purposes.
Test of strength
So far, the future of the restoration program is unclear, since the EU countries will consider it only at the June 19 summit. The conditions for providing financial assistance are likely to change since the launch of the program requires the unanimous approval of all 27 EU members. However, it is now clear that the coronavirus pandemic has become a test of strength for Europe and will inevitably change the alliance. The fact is that, against the backdrop of a fierce confrontation between the South and the north, caused by stable economic stratification and a lack of European solidarity, the purely financial crisis quickly transformed into a political one.
Europe is at a crossroads: either the EU countries will be able to resolve differences and rally in the fight against the consequences of the epidemic, or the European Union will be able to repeat the Brexit scenario when one of the critical partners left the union. If European countries fail to unite, Italy may be a likely candidate for elimination. In the country in the spring of 2020, the popularity of Eurosceptics was rapidly growing. In November 2018, this figure was much lower – 28 per cent.
If the countries of Europe manage to overcome their differences and agree on a recovery plan developed by the EC, the role of the European Commission will increase dramatically. Currently, the influence of the EC is minimal, since it is financially dependent on the contributions of member countries to the budget. However, the return of a considerable debt of hundreds of billions of euros will require increasing the income of the pan-European budget. It can be done either reducing the costs of current programs and increasing the contributions of states or introducing pan-European taxes that will go directly to the EU treasury, bypassing national budgets – for example, taxes on large digital companies, on plastic, on income from trading carbon credits. The right to issue general debt and collect taxes directly will give the European Commission the authority of the federal government, and Europe will completely change and become more like the United States of America.