COVID-19 shows how and why the EU is doomed

When faced with the COVID-19 crisis, once again it becomes clear that the core political allegiance in Europe is to the nation state, not the EU. Yet the entire European project is founded on the idea that it is (or at least, is becoming) the other way around. Ultimately, the centre cannot, and will not, hold

The EU as the Titanic
Tim Hedges
On 7 April 2020 10:22

For the EU-romantic, the European project began immediately after the war, with all the hopes of peace and harmony which suffuse it today. For the Eurosceptic, it began in 1992 with the Maastricht Treaty, when the EU became a state. But for historians of the future it may well be a purely 21st century story.

The test of any political project is its ability to withstand shocks. And shocks there have been aplenty since the turn of the millennium. I believe history will show that each of these shocks stems from the fact that individual countries in the EU are different, whilst for political reasons people pretend they are the same.

History will show, furthermore, that the natural reaction to a crisis is to fall back on the nation state. Every European politician has made a speech saying ‘Of course I am a devoted European, but….’

The crisis of 2012 came as we were already weak from 2008: many banks had filled their balance sheets with their national debt, both as a patriotic gesture and to save them from performing their proper but more difficult role of lending to industry. Quickly a banking crisis became a sovereign debt crisis.

The reaction of Germany and France was to realise with bewilderment that they had incompetent bankers. A banker judges risk and reward but theirs had lent heavily to Greece, simply because it paid more. You might have thought this would have been a clue (it’s called risk premium) but European regulators treated all European sovereign risk as the same. The banks thought it was like lending to Berlin at double the return.

The French and Germans panicked, and organised the rescue of their banks, which they called ‘the Greek bailout’. The Eurozone taxpayer paid off the banks and then let the Greeks go hang. Every girl for herself.

The second crisis was of migration. All countries in the EU are the same, remember, and there was one rule, called the Dublin Accord, to regulate them. It said that migrants must apply for refuge in the countries they came to.

The problem is, the countries nearest Africa and the Middle East aren’t the countries the migrants want to end up in. They had heard even in their foreign misery that the places to go were Germany, the UK, Sweden; not Greece, Italy, Spain.

The reaction of Europe was to shut up shop. France and Austria closed their borders with Italy, France with Spain; and Greece could easily be forgotten (it borders Bulgaria). In troubled times, they reverted to the nation state.

Now, the crisis is the Coronavirus. Of course everyone has closed their borders, this is no time for solidarity. In addition, nine countries including France and Italy, have demanded Coronabonds. This would be an obligation of the entire EU, used to finance countries’ enormous expenditure on the virus.

Well, it’s a great name, Coronabonds, but we have been here before, with the other shocks, and the north doesn’t approve. The only way Helmut Kohl could persuade his people to give up their beloved Deutsche Mark for the euro was to promise they would never have to stand pat for other (southern, catholic, olive growing) countries.

Some betrayal of Helmut’s promise has already taken place. To avoid excessive shovelling around of cash, payments between Eurozone countries are netted off, as in a clearing house, by a system called Target 2. At present, Italy owes around €350 billion under Target 2, whilst Germany is owed around €750 billion.

Now imagine you owned one of these Coronabonds and could present it for payment at Bucharest, Athens, Rome or Berlin. Which would you choose? Correct. Straight on to the Target 2. It would be like a drunk getting another whisky on his tab.

Some economists, such as Wolfgang Munchau in the FT, believe the Eurozone cannot survive without a common debt instrument. But it has caused a political rift, particularly in the emotive circumstances of people dying from an invisible disease, which may never heal.

Here is the Corriere della Sera, Milan’s newspaper, far from anti-establishment: ‘Now, more than ever, there is not a single Europe, there are two. Different, far from each other in mindset, suspicious of each other.’ It lists, on one side, France, Italy, Spain; on the other, Germany, Holland and ‘the bureaucrats’.

From the other philosophy, Wopke Hoekstra, the Dutch Finance Minister, confronted with the request for Coronabonds, demanded an enquiry as to why these countries did not have sufficient reserves to cope with a crisis. Great guy.

In the end, there will be some compromise: a micro Marshall Plan where these poorer countries will be tossed a few euros to keep quiet. But Italy and Spain may be entitled to ask, if now is not the time for the solidarity promised in so many fine speeches, when, exactly, is?

Tim Hedges, The Commentator's Italy Correspondent, had a career in corporate finance before moving to Rome where he works as a freelancewriter, novelist, and farmer. You can read more of his articles about Italy here

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