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‘Corona bonds’ and Europe’s north-south divide

La decisione dell’Eurogruppo di respingere i coronabond ha ripoposto la divisione tra Paesi del Nord e Paesi del Sud Europa, ed è destinata a pordurre un effetto destabilizzante nell’Unione Europea. Da “Social Europe”.

It is a cruel twist of fate that the Covid-19 crisis has exposed the basic faultline in the eurozone between north and south. The resulting debate about how to craft a joint response has been bitter.

The compromise agreed provisionally by the Eurogroup meeting of finance ministers on April 9th was a relief. For the Eurogroup to have broken up a second time in a week without a deal would have been a disaster. It would probably not have resulted in a bond-market panic—massive interventions by the European Central Bank have neutralised that possibility for now. But in political terms it would have sent a terrible signal of disunity.

The three-pronged package—with funding for health expenditure via the European Stability Mechanism, loans for businesses from the European Investment Bank and €100 billion for the European Commission’s unemployment fund—is modest in scope. It is disappointing to those of us who support the ‘corona bonds’ position. But it is a relief at least that it was a compromise, rather than a humiliating capitulation inflicted on the coalition of the nine advocates of corona bonds by the stubborn and short-sighted egotism of the Dutch and Germans.

Indeed, in political terms the Dutch may have done their cause more harm than good with their demand that ESM loans should be conditional on structural adjustment. Rather than as allies of the Dutch, the Germans now prefer to be seen as mediators.

Admission of incapacity

In relation to the current crisis, even if we take the generous headline figure of €540 billion for the support package at face value, the deal is an admission of European incapacity. In light of the trillion-dollar hit to the global economy, its modest dimensions amount to an admission that priority in crisis-fighting remains with the nation-states.

The best that can be said is that it provides a framework for further negotiation. There is the commitment to establish a temporary reconstruction fund, to be financed with ‘innovative tools’—what that means remains to be seen. Unfortunately, given our experience in the last few weeks, short of a change of government in the Netherlands there is little reason to be optimistic.

When the immediate health crisis has passed, when ‘all’ that is at stake is the misery of mass unemployment in Spain or a further shock to Italy’s growth prospects, why should we expect the northern states to act any more co-operatively than they have since 2010? The ratios of public debt to gross domestic product will be worse. Expect the discourse of debt sustainability and fiscal responsibility to be as relentless as ever.

Of course, one should never say never. Sophisticated polling reveals an openness on the part of the German public towards corona bonds, which could be exploited by creative and brave political leadership. Expert opinion has shifted quite markedly; the broad-based calls for joint action from German economists are new and extremely welcome. Both in Germany and the Netherlands a large part of the public is frankly embarrassed by their government’s positions.

The political argument is not over. It will resume when the heads of government next meet. But one thing is already clear: crisis-fighting proposals based on the ESM are, in practice, a dead letter. The path to an agreement on April 9th was only cleared when the Dutch finally abandoned their demand that the main form of support be ESM loans with conditionality. Even in the attenuated form in which it is included in the current package, the mere mention of the ESM is enough to trigger outrage in Italy.

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