Aedan MacRae

Aedan MacRae

EU: Papering over the chasm

Reading Time: 6 minutes

Recent meetings of EU leaders have confirmed the naked self-interest of state strategies, argues Aedan MacRae. This week’s attempts at compromise cannot conceal the extent of the divide between the European north and south.

The latest meeting of EU chiefs on Thursday (23 April) has confirmed the pressures of competitive state interest which are degrading the bloc at a time of intense conflict. Though a show of unity accompanied the confirmation of the giant bailout package, fundamental antagonisms were left to fester.

This meeting follows from the historic meeting of Thursday 9 April, when finance ministers forming the Eurogroup (the group of finance ministers from states who use the Euro) came to an agreement over the economic rescue package in response to the coronavirus after a marathon video link meeting. The divide between some of the key players in this group has grown as large as the physical distance separating them during the meeting.

In particular, divisions between creditor and debtor nations (often simply labelled north and south) which became frightfully clear during the Eurozone crisis, are once again in the spotlight. France, Spain, Italy and six other member states last month called for the issuing of common Eurobonds, or ‘coronabonds’, with the Netherlands, Germany, Austria and Finland among those opposing such action. ‘The nine’ argued that it is only fair that the pernicious levels of debt which will be accumulated fighting this virus be paid for under the same circumstances. Covid-19 knows no borders, so why should the debt it will incur?

However, their argument was not only for solidarity. These nine were correct to point out that their northern counterparts cannot afford for Italy or Spain to default, or in drastic circumstances even defect from the Euro. In the opposing corner, the Netherlands have been the flag bearer for the position that rejects any mutualisation of debt. This stance is held under the pretence that it is in the best interest of Italy, Spain and others, as it encourages these nations to make their own hard choices. But this argument is at best flimsy and at worst cruel. Thus, the wounds created by the eurozone crisis are being reopened, with Fernando Giugliano succinctly summarising the political dangers of these contrasting positions: “The conflict between Italy and the Netherlands has already caused great political damage. The Dutch government is coming across as insensitive at a time of deep human crisis. The Italian government… is playing into the hands of the country’s euroskeptics, including Matteo Salvini’s right-wing League”.

Clearly a working compromise is not just in the interest of the EU itself but also of the opposing member states. Fulfilling the competitive, self-interested conception of nations states purported by the ‘realist’ school of academic thought in a time of unparalleled crisis and pain will ultimately prove unhelpful to all involved. Indeed, most leaders will pay lip-service to this fact.

But the measures announced in the package may only fuel this division further in the future, with billions being added to the liabilities of many of the worst-hit and most precarious members. It may simply be the reassertion of what Yannis Varoufakis terms ‘debtor’s prison’ in his book ‘Adults in the Room’. Giugliano is therefore correct to suggest that some form of debt mutualization is desirable at some point.

However, it may very well come too late. Once the debt inevitably begins to crush nations such as Italy and Spain, the ominous spectre of austerity looms. The money announced on Thursday, after all, is comprised of loans, not grants. Varoufakis has described this approach as “helping the fallen get up but striking them over the head as they begin to rise”. So, a disproportionate amount of debt will be shouldered by the weakest union members. The far-right League in Italy and Vox in Spain will be rubbing their hands together with glee.

Nonetheless, the Dutch government’s position of a complete rejection of Eurobonds is wholeheartedly supported by the nation’s parliament and almost certainly the citizens. You can be sure that German and Austrian citizens also have reservations over a common debt instrument. Yet, the debt is not being transferred direct from Italy’s books to that of the northern nations. This debt would be transferred to the eurozone which, at present, has none. The European Central Bank (ECB) does not act in the same way as a national central bank in this regard. It cannot currently be leaned on in the same way the UK is leaning on the Bank of England or the US on the Federal Reserve. Furthermore, the strength of the exporting nations in the north is threatened by an economic collapse of other eurozone nations. Members like Germany and the Netherlands benefit enormously from the impact that deficit nations such as Italy, Spain and Greece have on the Euro. If a common currency means shared problems, it should also mean shared solutions. Indeed, Spanish foreign minister Arrancha Gonzalez reminded the Dutch that “a first-class cabin [will] not protect you when the whole ship sinks”.

Heedless, in the run-up to Thursday’s meeting, the Dutch, with an obstinance which has dismayed many observers, and contrasting the South’s moves towards compromise, had killed the initiative towards common debt represented by ‘coronabonds’. Soon after the Eurogroup Varoufakis asserted that the Dutch had won out, stating that: “this debate is now dead in the water, killed off by the Eurogroup’s decision to rely almost entirely on new debts falling squarely on the member states’ weakened shoulders”.

Varoufakis, with perhaps more first-hand knowledge of negotiating debt and austerity with the Eurozone and ECB than anyone, laments the opportunity missed. It is hard to dispute his position. More malicious debt being piled onto already heavily indebted nations may lead to a level of political animosity in Europe long since considered banished. Even more terrifying is the prospect of another round of even deeper and more disastrous austerity to pay for a crisis for which no one is to blame.

In light of this, a Spanish non-paper for Thursday’s European Council meeting (which brings together all 27 EU member-state leaders), seemed like a generous compromise. This non-paper made proposals based on three ‘pillars’. First the Spanish asked that the measures agreed in the recovery package two weeks earlier be implemented fully by 1 June. Second, they requested the establishment of an extensive recovery fund (€1.5tn) financed through the EU issuing perpetual bonds, of which the principal loan need not be repaid, only the interest payments. Interest on the debt, they suggested, should largely be covered by new taxes, such as a carbon tax, whilst the fund should support economic recovery by supporting the ecological and technological transformation of the economy. Crucially, the proposed fund would make grants, not loans, to member states. Finally, the non-paper proposes that the EU’s Multiannual Financial Framework (essentially the EU’s budget) be fully utilised to counter the effects of coronavirus. Some have argued that the overall EU budget should remain unconnected to crisis responses, however Commission president Ursula Von Der Leyen has contended that this budget should become the EU’s ‘marshall plan’.

The Spanish proposals are both measured and reasonable, with Martin Sandbu of the Financial Times labelling the proposal “irrefutable”. Both politicians and citizens alike then, had reasonable cause for optimism going into the European Council video conference. However, it seems that not even compromise and reasonable proposals can cut through the defensiveness and aggressive self-interest of leading states.

News throughout Europe and beyond has been awash with headlines proclaiming that the very future of the Euro, and indeed Europe, is at stake. Italian PM Giuseppe Conte had given the stark warning that: “If we do not seize the opportunity to put new life into the European project, the risk of failure is real”. These headlines are not hyperbolic and yet, EU leaders parried. Ultimately the European Council meeting was defined more by what wasn’t decided, rather than by what definitive action was taken.

The package agreed at the Eurogroup two weeks before was given the green light and as per Spain’s non-paper, will be implemented by 1 June. Beyond this the headline from the meeting was that leaders had agreed a substantial recovery fund is required. The nature and detail of such a recovery fund will now be considered by the Commission in the coming weeks. Therefore, elected leaders and ministers have once again allowed the critical aspects of a crucial decision to be made by technocrats. Those who lament the accountability and legitimacy deficits in the EU may wish to consider that the problem not only lies with a powerful European bureaucracy but also with member-states entering decision-making fora and allowing national interest to heavily outgun cooperation.

The divisions between creditor and debtor nations over Eurobonds may have evaporated but a tediously similar division arose on Thursday. That is between those advocating grants and those advocating loans.

Despite ‘frugal’ nations, including the Netherlands, Sweden and Austria all opposing grants, Von Der Leyen has suggested that the recovery package will ultimately be a mix of both loans and grants. It now seems likely that much of the response will be through the EU 7-year budget. Member-states may increase contributions with budget allocations being front-loaded. By allocating money through the budget, what are essentially grants to the worst hit member-states can be simply named budget spending. For the northern member-states, it is crucial to maintain their image as fiscally responsible states vigorously opposed to ‘handouts’. The prospect of an essentially loan-driven package is still likely, with a disastrous reliance on national debt and austerity unfortunately possible.

As the crisis continues it is likely that the considerably distorted images of the efficient north and profligate south will be unhelpfully reinforced. Clearly, even decades of political and economic harmonisation and cooperation are unable to break down national self-interest. Faith in the capacity of the EU’s central institutions and guiding national forces to generate European solidarity is collapsing.

Image: European People’s Party

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