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Illustration by Mahgul Farooqui

Coronavirus: The End of the European Union?

Merkel does not understand that coronavirus has put the EU at a crossroads: either it accelerates the integration process, or it disintegrates. Appropriate action on the economic front is the deciding factor as to which path it takes.

Apr 4, 2020

On March. 25, nine European countries — including Italy, France and Spain — sent an open letter to the President of the European Council, Charles Michel, asking to create corona bonds to face the economic crisis caused by the pandemic. Corona bonds are joint debt issued by the European Investment Bank to member states of the EU. This is mutualized debt, taken by all member states of the Union. Corona bonds would not only represent a much awaited source of income for member states struggling with the pandemic but would also signify a further integration of European economies. In fact, corona bonds would be the first step toward the creation of a fiscal union.
Currently, the EU is only a monetary union, meaning that it shares the same currency, but each state still makes its own fiscal policies. In order to have a shared fiscal policy, countries must guarantee for each others' sovereign debt. Corona bonds are effectively joint debt shared among EU countries.
The corona bond proposal was promptly rejected by Germany, Holland, Austria, Denmark, Sweden and Finland, which instead proposed to utilize the European Stability Mechanism (ESM), which is a precautionary credit line to tackle the economic crisis caused by the pandemic. In order to gain access to the ESM precautionary credit line, a government must meet certain criteria, including a 60 percent debt to GDP ratio. Currently, this criteria is only met by 13 out of the 27 EU member states. In fact, Italy, Spain and France, the three EU members worst hit by the pandemic, would be automatically excluded from the ESM precautionary credit line for failing to fit this particular criterion.
The ESM offers another credit line for countries that fail to meet the 60 percent debt to GDP ratio, called the enhanced credit line, and it obliges countries to take corrective measures that will allow them to fall within the ratio the next time around. These measures include structural reforms such as slashing public spending, inducing mass privatization and broadening the tax base. These are all measures that countries can attempt to undertake during periods of economic and social stability, but certainly not during a global pandemic. Therefore, even the enhanced credit line is out of the question for the members hit hardest by this crisis.
By rejecting corona bonds and proposing the ESM credit lines, Germany, Holland, Austria and the Scandinavian countries have showcased an unprecedented lack of empathy toward their European neighbors. If EU members refuse to help each other in times of emergency, what is the purpose of a European Union? Germany should be reminded that in 1954 when it was on the verge of default due to unpaid WWII reparations, the members of the European Coal and Steel Community allowed its debt to be halved from 23 billion U.S. dollars to 11.5 billion U.S. dollars and defer the payment over a 30 year period. Without this concession, Germany would have faced economic upheaval.
The generosity that allowed Germany to recover back in the 1950s is not being reciprocated now. At a time when Italy and Spain are tackling overcrowded hospitals and tens of thousands of deaths, Germany offers insulting assistance measures such as the ESM credit lines. The ESM credit lines were created to deal with asymmetric shocks, whereby an unanticipated change in an economic variable would push a region or an economic sector out of its normal cycle. The coronavirus pandemic is a symmetric shock since it affects all regions and sectors equally. By proposing a tool that deals with asymmetric shocks, it appears that Germany is trying to blame Italy and Spain for the outbreak of the virus. Chancellor Merkel should realize that while the speculation that led to the 2008 global meltdown harshly hit less virtuous economies, this virus hits all economies. This is why a measure like corona bonds, which allows EU countries to guarantee for each other’s financial obligations, is ideal in such a scenario.
I would go one step further. The European Central Bank (ECB) should seize this moment to mutualize all sovereign debt. The latest projections for Italy’s GDP growth in 2020 are negative six percent, with a debt to GDP ratio that will uptick from 137 percent to 147 percent. These are unsustainable levels of debt that will lead Italian sovereign yields to rise dramatically.
In the long run, these yields will suffocate struggling economies such as the Italian one, potentially forcing Italy out of the Union. Germany should know that having a founding member like Italy leave the union will not only hurt them economically, but may lead to the collapse of the entire EU structure. For Germany’s economy, which is highly dependent on exports to other European nations, this would result in an economic catastrophe. The German currency would strengthen, making their ability to sell their products more difficult, potentially forcing the country into a recession. In order to avoid this dire scenario, Germany should make a concession now, by allowing the ECB to mutualize all sovereign debt, to continue prospering within the economic structure that favors them most. In fact, by mutualizing sovereign debt, the government yields of risky economies such as the Italian one would benefit from low ‘risk-free’ interest rates, because their debt would be guaranteed by other European nations. This will stabilize struggling economies such as the Italian one and allow governments to take on the much needed structural reforms to lower their public debt.
If Germany and the other EU members opposing corona bonds and a mutualization of sovereign debt fail to understand this, we may truly be headed toward a disintegration of the European dream. Far-right populist parties are already trying to tackle the advancement of European integration. We don’t need Germany to join their side.
Andrea Arletti is Managing Editor. Email him at
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