After 14 hours of laboured discussions failed to produce agreement, eurozone finance ministers will regroup by teleconference on Thursday to find a common response to the coronavirus pandemic. For the survival of the eurozone and the entire post-1945 project of European unity, it is of paramount importance that ministers do not waste their second bite at the cherry. The issues at stake are politically divisive, at national and European level, and they raise genuine matters of principle for many governments. However, a second signal of high-level disagreement in less than a week would sow serious doubts in financial markets and around the world about Europe’s ability to get its act together.
The pandemic’s impact on the eurozone’s economy and public finances is so devastating that a common effort, with the united firepower of the European Central Bank, the EU institutions and national governments, is the only sensible way forward. The collapse of economic output in the second quarter of this year will be the biggest in modern history. Some governments can be expected to arrive at the year’s end with budget deficits of as much as 20 per cent of gross domestic product. Restoring employment, reviving stricken sectors and keeping public debts at manageable levels may prove to be beyond the power of certain governments without mutual support.
The two chief areas of dispute concern common debt issuance, known in this emergency as “coronabonds”, and the deployment of the European Stability Mechanism, the EU’s crisis-fighting instrument. Opposition to jointly issued debt is so entrenched in Germany, the Netherlands and like-minded northern European countries that a breakthrough appears impossible. However, the case for issuing common debt is gathering support as the full consequences of the pandemic unfold. Should resisters prevail, it is unclear what crisis will ever be big enough to transform the eurozone from its condition as a half-built, permanently vulnerable currency union.
As for the ESM, the Dutch and Italian governments share blame for Wednesday’s failure to find a compromise allowing the bailout fund to release loans or set up credit lines with only mild conditionality. The impression persists that the Dutch — and, behind them, other northerners — want to hold potential borrowers such as Italy accountable for past episodes of fiscal irresponsibility rather than to fight present or future battles together. Still, Italy’s rejection of any form of conditionality reflects the poisonous influence of domestic politics as much as sincere concern that the terms of assistance may be tightened after the worst of the emergency is over.
Activating the ESM is a useful step, because it will permit expanded ECB operations to protect Italy and others burdened with large and rising stocks of sovereign debt. However, the stark reality is that, if governments want their 21-year-old monetary union to survive intact and without a catastrophic debt default, the ECB will probably have to take on a vastly bigger role in any case — as the Federal Reserve is doing in the US.
Barring the improbable event that eurozone leaders establish a common treasury, or that Germany, the Netherlands and their allies support Italy and others with bilateral measures, the ECB is the most credible defender of the eurozone. It will have to be ready to buy government bonds in as large quantities as necessary to hold together the currency union. Europe’s leaders need to ask themselves whether, over time, such lopsided reliance on the ECB will be politically sustainable.
Source: Financial Times
