Throughout the month of July, the 27 nations of the European Union will be engaged in high stakes negotiations to decide how Europe will respond collectively to the economic crisis unleashed by the Coronavirus pandemic. These negotiations will center around a relief plan—proposed by German Chancellor Angela Merkel and French President Emmanuel Macron and adopted with modifications by EU Commission President Ursula von der Leyen—that would represent what some have called a Hamiltonian revolution for the bloc.
The plan has as its focal point the mutualization of €750 billion in debt to be raised by the EU and distributed to member states according to their need, something that has never been done before and was a nonstarter during the bloc’s response to the sovereign debt crisis in 2010 and 2012. But, this crisis has already witnessed a radically different response from Europe’s institutions as compared to the sovereign debt crisis. In March, for example, President of the European Central Bank Christine Lagarde announced that the ECB would, for the duration of the Coronavirus crisis, cease enforcement of one of the criteria of convergence of the Maastricht Treaty—the founding document of the Eurozone. The treaty states that a member state’s annual public deficit cannot exceed 3% of their GDP. By contrast, the policies of austerity imposed on Greece, Spain, Italy, and Portugal in response to the debt crisis were specifically designed to bring these countries’ budgets and debts back in line with the criteria of convergence while any thought of lifting some of these restrictions, even temporarily, was deemed unconscionable.
The mutualization of debt represents the next step in Europe’s barrier-breaking response. Such a mutualization would be a game changer for many of the countries of Europe’s South who not only have generally weaker economies that heavily rely on American summer tourists dollars and thus have been harder hit by the Coronavirus. This is because the EU borrows at the same interest rates as Germany—who has the largest and perhaps the strongest economy in Europe as well as a government that prides itself on being fiscally responsible. So, the rates available to Germany—and therefore the EU—are much lower than those available to countries in the South such as Greece, Spain, or Italy. So, by mutualizing the debt, these countries will have access to the money they need at a much lower cost of borrowing, putting less of a strain on their budgets.
But, the flip side of this is that when it comes time to pay all of this back, who will foot the bill? President von der Leyen has floated three possibilities: either the Commission will demand larger contributions to the EU budget from members, the EU will reduce its spending, or the EU could find its own revenue source, potentially through bloc-wide taxes which would constitute another major step towards a more federalized EU. However, all three of these options seem unacceptable to a group of northern European countries dubbed “The Frugal Four” that have voiced their opposition to the plan. The Netherlands, Austria, Denmark, and Sweden have long been opposed to any mutualization of debt. They argue that it would be unfair to use the budgets of wealthier, more fiscally responsible countries as collateral so that Europe’s struggling countries get lower interest rates than their economies merit. They see a moral hazard problem in that mutualized debt would force them to bail out any member state that failed to pay its debts and, as such, none of the struggling countries will undertake the necessary budgetary reforms to minimize their risk. They propose sticking to the playbook from 2010 where all loans and aid are tied to mandatory budgetary reforms and struggling countries borrow at the interest rates available to them, not the EU.
Until recently, the Frugal Four counted Germany among their ranks, but Merkel’s defection has put wind in the sails of French President Macron who has long advocated for greater EU integration and who has just returned from a visit to the Netherlands in an attempt to win over the Dutch as well. According to Macron, the issue is not the fiscal responsibility of France’s southern neighbors, but the need for greater solidarity within Europe in order to stand strong against an increasingly ambitious China and an increasingly isolated U.S. Germany, who will take over presidency of the European Council on July 1, is pushing to have an agreement before the Council goes on recess for the summer at the end of July. Only time will tell what the European relief plan will ultimately look like, but the Coronavirus pandemic and it’s historic disruptions have made it hard to imagine that the EU will put off further integration for long.