The future of Europe is being decided now

Given the ravages of the coronavirus crisis, the future of Europe cannot be one of permanent division between its northern and southern states.

We are going through the gravest European crisis since the integration project began. The divisions which emerged during the European Council on March 26th are unprecedented in the history of the European Union.

Faced with the devastation of the continent’s public health, the 27 heads of government of the EU member states decided not to decide. Pathetically, they asked their finance ministers to come up with a shared position in 15 days. A dramatic, but inevitable, choice—given the division between the northern countries (led by the Netherlands and including Germany) and the southern countries (led by Italy and Spain and including France) over how to deal with the pandemic.

In the run-up to the meeting, Yuval Noah Harari wrote that, given the challenge of Covid-19, ‘humankind is now facing a global crisis’. And he went on: ‘Perhaps the biggest crisis of our generation. The decisions people and governments take in the next few weeks will probably shape the world for years to come. They will shape not just our healthcare systems but also our economy, politics and culture.’ In Europe, those decisions will shape the very direction of the integration project.

Support on condition

For the northern countries, even when crises are symmetrical, such as that caused by Covid-19, every country must rely on its own resources—albeit this can include an increased deficit, following the suspension of the Stability and Growth Pact recently agreed by the Council of Economic and Financial Ministers. If a country needs further financial support, then there is the European Stability Mechanism (ESM), an intergovernmental treaty which can provide such support, to individual countries and on specific conditions. The country seeking help must show that its increased debt will be sustainable.

The Dutch finance minister, Wopke Hoekstra, claimed any support outside the conditionality of the EMS would entail ‘moral hazard’. The increase in debt would be punished by the finance markets, with a corresponding rise in the spread on that country’s public bonds. So, for the leaders of the northern countries, Italy, Spain or even France should use the ESM to obtain the funds to fight Covid-19 and its consequences—negotiating less restrictive conditions, if necessary, but fully accepting the intergovernmental logic of the ESM treaty.

This position reflects a specific view of the EU and its future. For those leaders, the EU is (and should remain) an institutionalised confederation based on the principle that each state is sovereign. Of course, sovereignty is interpreted in a congenial way (for them). In fiscal policy, for instance, the moral-hazard concern is absent.

The Netherlands lies in third position, after Bermuda and Cayman, in the global fiscal paradises ranking for multinational corporations. As a tax haven, Holland allows multinational corporations to escape fiscal obligations towards the country where they are located. Fiat Chrysler moved to Amsterdam, saving 20-30 millions of euro annually due to the Italian state—money which would have been useful for improving the latter’s health services. The Netherlands has opposed any attempt by the commission to harmonise national fiscal rules in the EU single market.

Thus, for the leaders of the northern coalition, there cannot be European solidarity, beyond the rules celebrated by the treaties. It is surprising (considering its history) that this position has been adopted by the current German leadership. The confederal logic is magnified by the central role of the European Council, considered to be the only legitimate forum in which to take collegial decisions—or to decide not to take them (as Luuk van Middelaar has explained in his recent book, Alarums and Excursions).

The European Council takes unanimous decisions and if that is not possible, as happened on March 26th, then it is best to defer the decision (and it doesn’t matter if the house is burning). For these countries there is not a European interest which is distinct from the sum of the individual national interests. For the northern countries, therefore, Covid-19 is not enough to cast doubt on the status quo. But why should an Italy or a Spain or a France accept this view, subjecting itself in this dramatic situation to the conditionality of the ESM?

European response

For the southern countries, since Covid-19 has brought all of Europe to its knees, a European response—not just national responses—is essential to tackle it. As made clear in the letter sent on March 25th to the European Council’s president by nine governmental leaders (of Belgium, France, Greece, Ireland, Italy, Luxembourg, Portugal, Slovenia and Spain, representing more than half of the EU population and its gross domestic product), the attached resources should be targeted at the healthcare war, and its economic consequences, rather than financing the current spending of the affected countries.

Indeed, some of these countries (Italy foremost) should be blamed for continuing to have unjustifiably high public debt. Italy’s current governing majority has lacked even the basic courage to eliminate unnecessary spending, such as that incurred by the previous government in bringing forward a reform which anticipated the retirement age (the so-called Quota 100 reform).

That notwithstanding, the crisis caused by the coronavirus has nothing to do with the condition of these states’ public finances. Even with lower public debt, Italy would not have the resources to manage the economic and healthcare consequences of a crisis which is of ‘potentially biblical proportions’, as the former European Central Bank president, Mario Draghi, put it.

For the leaders of these countries, there is therefore a European interest—in healthcare, in economic recovery—distinct from that of the individual states. Solidarity comes from the need to deal with a common challenge, not from a generic declaration of principles. Hence the need to use supranational and not intergovernmental financial instruments. As the nine governmental leaders said, ‘we need to work on a common debt instrument issued by a European institution to raise funds on the market on the same basis and to the benefits of all Member States’.

Supranational instruments

European debt securities, for dealing exclusively with Covid-19’s consequences, issued by an EU institution (such as the commission) might be guaranteed by the ECB (as a supranational institution), through the recently established Pandemic Emergency Purchase Programme (PEPP). Jacob Funk Kirkegaard wrote on March 23rd that, with this programme, ‘the European Central Bank has brought the continent closer to political and financial unity than was previously imaginable’.

If northern opposition to this proposal persists, Wolfgang Munchau suggested on March 30th, the nine countries ‘could set up a mutualized bond backed by themselves, in a coalition of the willing. They could then challenge the European Central Bank to buy these securities as part of its PEPP.’ The activation of supranational instruments should then represent a step towards the creation of a fiscal capacity for the eurozone (not to be confused with current fiscal regulation or surveillance).

After all, how can we go on with a single monetary policy and 19 national fiscal policies? In unions of states which have become federal (such as the United States and Switzerland), that fiscal capacity is necessarily limited and conditioned. The US introduced it in the 1787 constitution (article I, section 8), to respond to a crisis which had threatened the previous Articles of Confederation of 1781. Direct and indirect taxes are subject to such limitations that federal spending remained below 5 per cent of GDP for almost a century and a half (with the exception of the civil war).

Supranational fiscal capacity does not take fiscal sovereignty away from the states but serves (as Alexander Hamilton put it) to respond with common resources to common problems. This is the supranational perspective for emerging out of crisis.

In short, in this battle there is no right or wrong but there are different visions of Europe. It is in everyone’s interest to find a compromise between confederal (intergovernmental) and supranational (federal) visions. That compromise should not however coincide with the status quo, given the latter’s empirical inability to deal with a devastating challenge such as that brought by the diffusion of the coronavirus. 

Exceptional situations require exceptional responses. The Conference on the Future of Europe has truly begun.