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The Corona crisis is driving faster EU integration

21 April 2020

By Simon Gentry, Managing Partner

Every crisis, recession, war and disaster since I went to work in Brussels in 1990 has resulted in some way, both small and large, in the European Union further centralising and deepening its economic, and increasingly political, union.  The economic crisis resulting from the Coronavirus pandemic is proving to be no exception.

The EU-27 are currently locked in a fierce but familiar argument.  Is the remedy for the crisis more shared responsibility or should the members states be left to shoulder the burden themselves?

The issue this time is the gargantuan debts that most countries are racking up as they try to prevent a full-blown collapse of their economies and mass unemployment.  There is a familiar shape to the argument.  The southern European bloc – France, Spain, Portugal, Greece and, interestingly, Ireland – are calling for the EU to issue ‘Corona bonds’, sold on the basis that the 27 stand behind the debt.  This has a number of advantages, notably the fact that the price will be lower because markets trust Germany and the other Northern Eurozone governments.  But, and it’s a very big but, it will for the first time mutualise the debt, meaning that all 27 member states will carry the debt burden together going forward. This is currently a step too far for Germany and, most vocally, the Netherlands who’s Finance Minister is being depicted as the EU’s new Mr No.  Wopke Hoekstra’s blunt refusal to contemplate Dutch taxpayers being on the hook for the spending of the Italian and Spanish governments has led even Emmanuel Macron musing that this might spell the break-up of the Eurozone, if not the European Union itself.

The issue is of existential importance because for the EU Commission and most mainstream Continental thinkers it is inevitable, natural and desirable that the EU takes the next step towards integration by mutualising debt. The price would be much greater supervision of national budgets and stronger restraints on national government’s spending, with budgets needing to be submitted to the Commission before being approved by national legislators.

Given the depth of the economic crisis, with some such as McKinsey predicting that as many as 60 million Europeans, 11% of the work force, may be unemployed by 2021, it may be that the loss of economic and political sovereignty is a price worth paying to secure the prize of economic support from the wealthy north for most southern European citizens.

Underlying this, however, are the structural problems that bedevilled southern European economies before this crisis.  Low productivity, high levels of national debt, aging populations and high unemployment were serious and seemingly intractable challenges before the first reports of a new virus in Wuhan.  Mutualising borrowing is unlikely to help fix those problems in the aftermath of a sharp reduction in GDP across the Eurozone, but it may hide them for a few years longer.

As ever in the EU a compromise will be found. The 27 will move a bit closer to issuing some form of debt itself, and although it will not go as far as Italy and Spain would like it will be further than Berlin will admit now. As a result all national governments will probably need to submit to more economic scrutiny and control by Brussels (and Berlin).