After coronavirus: How will Europe rebuild?

The shock will be uneven – this requires a fiscal union

Coronavirus has given hope to those who wish to see the EU stumble. Countries have put their own needs first and trust among governments has diminished. A long-running north-south rift over the future of the eurozone risks widening into a deadly chasm.

The economic depression will hit government revenues and lead to soaring public debt and unemployment. But the virus’s impact will be uneven: some EU states start with loads of debt and rely on industries such as tourism that will be severely affected, notwithstanding the compromise that EU ministers signed up to on April 9.

Several southern countries, and especially Italy, face grim prospects. Italians feel that after the eurozone and migration crises the EU is once again abandoning them. Their economy has scarcely grown since the birth of the euro and public debt is 135% of GDP. The populist Matteo Salvini now questions EU membership and is well-placed to win the next election.

The European commission has struggled to give strong leadership, but most of the key levers on health, borders and the economy remain in national capitals.

The European Central Bank has come up with an impressive €750bn bond-buying programme. But ECB action will not suffice. The EU needs to take on a role in fiscal policy. France, Spain and Italy want the EU to issue bonds guaranteed by the member states. The biggest share of the money would go to the neediest countries, to subsidise spending on health, corporate grants, unemployment pay and investment.

Eurobonds would mean the better-off EU countries helping to limit dire outcomes in southern Europe. The Germans, Dutch and other northerners oppose, fearing this would discourage weaker countries from undertaking painful reforms. They have a point, but the alternative – eurozone members sinking into a negative spiral of falling GDP and rising debt, and perhaps exiting the EU – would be worse for all concerned.

If the EU cannot respond to Covid-19 by moving towards fiscal union it will lose credibility in many member states.

Charles Grant is director of the Centre for European Reform, an independent think-tank.

Read full article here.