- Zichen Hu
The EU: A delicate financial balancing act in a crisis
During the 2008 financial crisis, many observers ventured to predict the impending collapse of the European single currency. Since 2016, the chaos and turbulence caused by Brexit have also led to the legitimacy crisis entailing the frailty of the EU. Yet what these two crises did not do is speculate over the collapse of the EU itself. In the wake of the Covid-19 pandemic, as warned by Italy’s prime minister Giuseppe Conte, the EU risks failing the “biggest test after the Second World War”. From the pandemic emerged three unsolved problems; how to help enterprises survive, avoiding a large-scale economic collapse twinned with mass unemployment, how to alleviate the high debt and inflation pressure whilst preserving the credibility of the euro and finally how EU member states can overcome their differences in interests and conquer the pandemic with mutual-trust and burden-sharing.
Fiscal generosity comes with a price
The harsh measures of city lockdown and business shutdowns that countries are forced to take to prevent and control the epidemic have caused an unprecedented scale of bankruptcy of small and medium-sized enterprises in the EU, comparable only to the Great Depression of 1929. The EU countries worst hit by the pandemic have respectively introduced a number of measures to stabilize employment and launched hundreds of billions of euros in economic aid packages with unprecedented intensity, whilst the European Central Bank (ECB) has announced €750 billion Pandemic Emergency Purchase Programme (PEPP) and will increase the programme as needed.
However, such fiscal generosity comes with a price of high debt pressure and inflation. With money printing on that scale, fears are growing that wartime levels of fiscal deficits and massive expansions of the money stock inevitably lead to lasting reductions in supply and a high inflation boosted by sharp recovery in demand when the epidemic calms. The credibility of the Euro currency is crucially associated with the ability of the ECB to target a predictable and stable value of inflation. Therefore, stabilizing the economy by further easing monetary conditions may exacerbate an inflationary pressure and so push the ECB further away from its objective to stabilize prices.
How can EU countries overcome their differences in interests and work together?
The EU has been exposed to the problems of insufficient resources for economic regulation and control, and the differences among member states are only exacerbated by this crisis. Cash-stricken Italy, with the support of Spain, France and six others, are pushing for the EU to agree on a mechanism to share the debt burden of the post-pandemic economic recovery across the bloc. Leaders of those worst-hit countries warn that the failure to prop up the high-debt countries risks a new Eurozone sovereign debt crisis that could endanger the currency.
While the creation of such eurobonds would send a strong signal of solidarity in the face of a crisis for which no nation is to blame, there is a growing panic amongst the EU group that Italy, Spain and France’s response to the global pandemic could see their economies sink by the debt costs in the future. Sceptics of the so-called “coronabonds” plan fear that Rome, Paris and Madrid could be using the global pandemic to cash in on their wealthier northern neighbours' financial success. After a 16-hour teleconference that concluded on 8th April, eurozone finance ministers still failed to find an agreement on the economic package to tackle the economic impact of the coronavirus. The Netherlands and Germany in particular opposed the idea and continued to insist on strict conditions for soft loans to hard-hit countries like Spain and Italy under the eurozone bailout fund, the European Stability Mechanism (ESM), fearing that they will “pay the bills” to countries with unstable fiscal revenues and expenditures and leading to a clash between finance ministers of the eurozone .
The top two goals of the European Union are to promote peace and the well-being of its citizens and offer freedom, security and justice without internal borders. However, in the past few years, Europe has been violently impacted by the populist torrent. Exemplified whether in Germany, France or Spain, the parties that promote populism have performed well in the elections. Without the EU deploying a stronger coordinating force, further divisions, barriers and turbulence are likely to be triggered that undermine the competitiveness of the European continent in the world. In addition, EU countries also need to convince markets about the solidity of their fiscal plans irrespective of ECB interventions and operate vast fiscal redistribution, which will, possibly, increase taxes to repay exploding debt in the medium-term.
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