Coronavirus risks widening North-South divide

Knee-jerk border closures and export restrictions on medical gear were only an early warning signal that the coronavirus crisis could torpedo Europe’s political unity.

A long but deeply imbalanced period of economic recovery and government bailouts will ultimately be a far sterner test of whether the EU can survive.

The danger of the current cycle of massive state-backed financial rescues is that it will reopen the North-South fissures of the eurozone crisis by widening the economic gulf between the bloc’s haves and have-nots.

In theory, Europe is meant to be a common trading area where companies from Germany compete on an equal footing with those from Portugal. The problem of the coronavirus recovery is that the richer nations can pour money into saving their industrial champions and guarantee bank loans to smaller businesses, while poor countries cannot match that firepower.

Although the sums promised for bailouts are in constant flux, the scale of the EU’s corona schism is clear. Of the approximately €1.95 trillion of national support measures approved by Brussels, the European Commission says that Germany represented about 51 percent and France 17 percent.

To the southerners, it stings that rescued German companies are gaining such an edge over theirs in the crisis thanks to public money while Berlin simultaneously joins the Netherlands in opposing “corona bonds,” a form of  jointly-backed EU debt that would symbolize the solidarity of the pan-European project.

Carlo Calenda, a former Italian trade minister who is now a socialist lawmaker in the European Parliament, said anti-German and anti-Dutch sentiment were “already very strong and widespread” in southern Europe.

“There is the feeling that countries such as Germany and the Netherlands are taking advantage of being strong in a Europe lacking solidarity,” he added.

That sense of an uneven playing field is only compounded by the unhappy geographical fact that it is Mediterranean countries that are also set to receive a devastating blow from the potential loss of the summer holiday season. Perhaps unsurprisingly, it is France, Spain, Italy and Greece where people now have the least trust in the EU, according to a survey by Eurofound, an EU agency specializing in social and labor policy. On a scale of 1 to 10 for faith in the EU, these countries only scored about 4 or below.

The macroeconomic numbers also leave little doubt about the disparity. While the German economy is expected to contract 6.5 percent over 2020, Greece is expected to contract 9.7 percent, Spain 9.4 percent and Italy 9.5 percent.

Paul Tang, a Dutch member of the European Parliament, was clear about the risk of such divergence. “If we fail to take action at the EU level, we risk disintegrating the single market and intensifying the antagonism between North and South,” he said.

Magical recovery funds

The European Commission certainly fears a multi-speed Europe could inflame divisions that have long festered. Brussels is looking to combat the inequalities through ideas such as a stronger budget and a recovery fund of more than €1 trillion. Competition chief Margrethe Vestager said the recovery cash should be distributed through the EU’s structural and investment funds, which guarantee support for poorer regions.

“We will need to distribute in order to recover together. These increasing asymmetries will otherwise fragment the single market to a level otherwise none of us is willing to accept,” she argued.

Similarly, European Commission Vice President Valdis Dombrovskis said that Brussels was considering an equity fund specifically to help the poorer nations that “cannot respond so strongly.”

There are many skeptics, however, about whether the Commission really is able to level the internal playing field with its recovery plans.

Luis Garicano, Valérie Hayer and Guy Verhofstadt, three MEPs with the Renew Europe group, said that the Commission was deploying some of its “standard-practice magic tricks.” The actual money being spent would be closer to €323 billion rather than a €2 trillion headline figure.

Paul De Grauwe of the London School of Economics agreed that many of the plans circulated were cosmetic and did not address the real issues. “Their resorting to technical trickery does not reassure me,” he said. “The basic problem remains that some countries are not ready to do real transfers.”

Maria Demertzis, from the think tank Bruegel warned that a pumped-up budget would rekindle familiar arguments.  “Who will pay for this? The EU budget cannot borrow to give grants. If you want that, you need to put more money in the pot,” she noted, adding that the discussion over the strengthening of the EU budget might lead to the same conflicts as with the corona bonds.

The significance of the Dutch-German opposition to corona bonds cannot be exaggerated in reading southern European frustration with Europe.

When explaining the May 6 Eurofound survey of 85,000 people where southern European trust in the EU was so weak, Massimiliano Mascherini, a researcher from the agency, noted that discussions between EU leaders had deepened a sense that “there was a lack of solidarity among the member states.”

Much of the focus has been on Dutch resistance to corona bonds.

After an April 10 meeting of the Eurogroup, Dutch Finance Minister Wopke Hoekstra lashed out at the idea: “Eurobonds is a thing I wasn’t OK with, I am not OK with and I will never be OK with,” he said.

“In a world dominated by social media, comments like that can be magnified, and after that is very hard to fix,” Mascherini said.

Left and right

These tensions are playing an increasing role in the politics of both parties on the hard left and right. Stelios Kouloglou, a Greek MEP from the left-wing Syriza party, said that the EU was in danger of making the same polarizing mistakes as in the eurozone debt crisis.

“This will completely destroy the idea of a common internal market,” he said, adding that the crisis of a decade ago “is being repeated without learning from its lessons.”

In Italy, where many felt stranded as the country bore the early brunt of the crisis, some of the political reaction has been extreme. Alarmingly for European federalists, Italian citizens have more trust in China, Russia and the U.S. rather than in other EU countries, a survey by the research center Demos at the end of April shows. Within the EU, sympathy for Viktor Orbán’s increasingly authoritarian Hungary has increased compared to the last year, while trust in Germany has halved.

“I am repulsed by the German attitude toward the European Union. They have distinguished themselves by their greed despite this crisis,” said Piernicola Pedicini, an MEP from the 5Star Movement, while predicting that “if people knew what is really happening, there would be a popular uprising tomorrow.”

Francesca Donato, an MEP of the far-right League, had no doubt about the outcome of an hypothetical referendum on exiting the EU in Italy, Spain and even France: “The leave side would win hands-down.”

As with the crisis in Greece, much of the strain on the divided continent would play out again over currency.

“The day after [the rescues] is going to be a situation of huge indebtedness: private debt but also fiscal debt, which could lead to country exclusions from the markets,” Demertzis from Bruegel said.

A debt spiral again raises the prospect of countries looking to exit the eurozone to boost exports and economic growth by devaluing their currency. Indeed, this time the stakes could be higher than during the Greek debt crisis.

“Greece was small, the money could be made available. But for other countries [such as Italy], there would be a need for a huge intervention by the European Stability Mechanism, which does not have this firepower,” Demertzis said.

De Grauwe, Demertzis and former International Monetary Fund official Carlo Cottarelli all looked to the European Central Bank to prevent the crisis by buying debt.

“Now is the time to solve the problem through the monetization of debt: You take a hit now, but at least you recover,” Demertzis said, referring to the process whereby central banks buy up bonds to inject cash into the economy.

The European Central Bank on March 18 announced a €750 billion “Pandemic Emergency Purchase Programme” to buy public and private debt until the end of 2020. De Grauwe called the €750 billion limit a mistake. “If the ECB declared it was ready to intervene without limits,” he said, then investors would “no longer fear that the governments will have no cash anymore to pay back their debts.”

According to European Parliament Vice President Dimitrios Papadimoulis, a new debt crisis could endanger “the very existence of the EU.”

Over the past years, Europe has been weakened by the sovereign debt crisis and disputes over refugee relocation, and a third big crisis could prove decisive, noted Kouloglou from Syriza.

“This is the third stroke, and usually when you cannot defend yourself during the third stroke, you die,” he said.

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