Ignoring painful lessons from the disastrous response to the 2008-2009 financial crisis has become a habit for northern European countries. Betting against their own futures during the recent European Union finance ministers’ gathering, they rejected the idea of a Eurobond or any other new centralized intervention for the economic catastrophe brought by COVID-19 — something that is likely to further weaken European, U.S. and global economies, now and in the future.
And the clock is ticking: The last opportunity to act will be April 23, when European leaders convene to approve their ministers’ document. So far, no unity has emerged for badly needed, centralized European fiscal action.
If radical ideas often are only possible during a crisis, none were considered by the European finance ministers. France is suggesting to raise a “recovery fund” of at least 500 billion euros ($543.6 billion). Italy, Spain and others favor issuing a Eurobond, similar to a Treasury bill, which would carry the implicit guarantee of the entire EU. Yet, Germany and the Netherlands, with Austria, Denmark, Finland and Sweden, have allowed only a rehash of old financing tools already available to member states, like the European Stabilization Mechanism (ESM) or the European Investment Bank (EIB), and a relatively small 100 billion euro fund, called SURE, to fight unemployment.
True, the tight conditionality — the need to produce reforms in order to access ESM funds — was removed, but only when funds are borrowed to support coronavirus-related medical and health expenses. If the language in the final communique was not clear enough, Dutch finance minister Wopke Hoekstra stressed that, if member countries borrow from the ESM to support crumbling economies, then conditionality would be imposed.
It may be better to have something than nothing, but the meeting’s outcome and Hoekstra’s harsh words are exactly the opposite of what should have happened in terms of the amount of the funding or, more important, in terms of political vision.
The European fiscal package now on the table amounts to about 540 billion euros ($600 billion). This compares with the U.S.’s $2 trillion fiscal package and, as of last week, $2.3 trillion more made available through the Federal Reserve, with still more to be allocated if needed. As the EU and U.S. GDPs are roughly equal (about $20 trillion each), the U.S. effort is about five times bigger than the EU’s. Even if we add actions by the European Central Bank and the generous unemployment subsidies distributed by EU states (which are not structurally part of a U.S. federal social-protection system), Europe still comes out quite short.
To match the U.S. effort of about 10 percent of GDP, a country such as Italy should have adopted a fiscal package of at least 200 billion euros. So far, Italy has set aside only 25 billion euros, about 1 percent of its GDP. The presently approved EU funding may add another 25 billion to 30 billion euros, roughly 2 percent — still not even close to what is needed.
More disheartening in the recent bitter negotiation was the lack of European leadership and long-term vision. Jean Monnet, one of the most important European “founding fathers,” used to say it was out of crisis that Europe would make important steps forward toward stronger integration. In 1974 he wrote: “The problems that our countries need to sort out are not the same as in 1950 … transfer of power to common institutions and a common approach to finding a solution to problems are the only answer in our current state of crisis.”
Today, everyone recognizes that those austerity measures were a mistake of historic proportions. In fact, setting aside the devastating Greek crisis, that decision led to a recession in most European countries, with the exception of Germany. Germany argues that its growth was possible because it already had introduced difficult structural reforms — but the truth is that Berlin was mostly advantaged by a very favorable euro exchange rate in relation to its economy. And the Netherlands, while preaching austerity and reforms, still thrives by offering a fiscal-haven status that takes vast sums from other EU members. The result? Europeans at large feel a growing disaffection towards Europe.
Having missed the 2008-2009 opportunity to follow Monnet’s teachings, Europe now should act dramatically at the April 23 leaders’ gathering. It is very rare that a train passes twice but, from the current bickering among EU capitals, the intention seems to be to miss that train again.
It also is in the interests of the U.S. Congress and the White House to demand that Europe dramatically raise its funding. If President Trump went well out of his way to ask for an already approved 2 percent increase in NATO expenses, he should ask in no uncertain terms that Europe match the U.S. in confronting COVID-19’s economic fallout.
What can be done? If exploring a Eurobond instrument is too technically complicated, the leaders should approve the French proposal for a European Recovery Fund, but it should be at least 1 trillion euros. An alternative could be some form of EU guarantee for member states for an equal or larger amount of 1.5 trillion euros. Even better, they could allow the EU Commission to appropriate 2 trillion to 2.5 trillion euros by borrowing adequate amounts from the ECB. This would require a change of the European Treaty — difficult but not impossible, especially in a crisis.
In 2017 in Lausanne, celebrating Monnet, then-ECB Chairman Mario Draghi, said: “What is being tested is our ability to manage integration in a way that not only delivers output legitimacy, but also a European affectio societatis. And that should encourage us to listen to the questions that are being asked of Europe and to be ambitious in responding to them.”
Being an old European Federalist since my teens — at the time when Monnet was delivering his crisis message — I can only hope European leaders remember his and Draghi’s words, to produce some real game-changer in the name of their people. It is a hope that is dimming, however.
This article was first published on The Hill on April 19th 2020.
Photo: Daniel Roland / AFP
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