Coronabonds or bust? - Gridlock over EU response poses an existential threat

The European Union’s response to the coronavirus pandemic has exposed a dangerous lack of solidarity between member states, as longstanding divisions over the future of European integration frustrate the fight against the coronavirus and the downturn it has caused – the worst since the Great Depression. After weeks of bungled responses, old fault lines between “north” and “south” have re-emerged, a marathon Eurogroup meeting on April 7 failing once again reach agreement. The European Union (EU) sits perched uncomfortably on an economic and political precipice, and the consequences could be massive.

The coronavirus pandemic has triggered a human catastrophe and economic crisis worldwide, with panicked lockdowns grinding economic gears to a near-halt. The global economy – already heading into a downturn when the coronavirus struck – is now experiencing a crisis that reaches deep into the productive sector of the economy, but the EU response has been patchwork and incoherent, a series of reactive and inadequate measures not equal to the scale of the problem.

The initial response came from national governments, most of whom instinctively closed their borders, locking down society and – eventually – industry. As the walls went up, desperate appeals from Italy for assistance fell on deaf ears, unheeded by all but China and Cuba, and Italy’s ambassador to the EU, warned that Europe’s leaders risk “going down in history like the leaders in 1914 who sleepwalked into World War I”. It was beginning to look like “European solidarity” was an idea for fairer weather.

The EU’s response

The European institutions shifted clumsily into catch-up mode, the European Central Bank (ECB) proposing a package of 120 billion euro to ensure liquidity in the financial and banking sector the same day that its President Christine Lagarde declared the central bank was “not here to close spreads” in sovereign debt markets. This brought a furious response from Italy, casting doubt on whether the ECB would provide member states the necessary support.

The ECB then announced its “bazooka” response – a €750 billion package of Quantitative Easing (QE) named the “Pandemic Emergency Purchase Programme” (PEPP). To allow the rapid expansion of public debt and facilitate heavy government spending, the ECB can buy large amounts of government and corporate debt until the end of the year, with significantly more flexible rules than previously. It suspends the 33% purchasing limit on national bonds, includes Greek sovereign debt and the ECB will target short-term debt maturing in as little as 70 days. State aid rules have also been loosened.

Crucially, the “general escape clause” of the EU’s Stability and Growth Pact (SGP) was activated – pausing a mechanism responsible for imposing austerity on member states through inflexible deficit and debt limits and structural reforms. Unprecedented stuff – but still not enough, and concerns remain about what the short duration of the PEPP will mean for EU member states’ capacity to service the resulting debt during a recession.

The burgeoning crisis quickly spilled over into a high-stakes political showdown across the EU. When the Eurogroup – the eurozone’s finance ministers – met on March 24 to draft a longer term “pandemic crisis support” tool. The main proposal was fresh loans under the European Stability Mechanism (ESM), the EU’s 410 billion euro bailout fund that allows eurozone members to draw a credit line worth 2 percent of their economic output – with conditions. This option is strongly supported by fiscally more conservative countries, like Germany and the Netherlands.

[Read the full article in TrademarkBelfast and Rosa Luxembourg Stiftung - Brussels' Post Brexit Europe here].