How to secure the future of the eurozone
Emmanuel Macron is right that without solidarity the single currency could fail
The economic and human devastation inflicted on Europe by the coronavirus pandemic is so severe that the survival of the eurozone and the postwar project of European integration as a whole is in peril without greater solidarity among its member states. That was the stark warning issued by French president Emmanuel Macron in an interview with the Financial Times last week. He is right. Europe, as he put it, is facing a moment of truth.
Jobs are being lost and output crushed everywhere. But the pain will be uneven. Mediterranean countries with important tourist industries may suffer longer than manufacturing economies as foreign visitors stay away in their millions this year. They also entered this crisis saddled with the legacy of the last one: high unemployment, large public debt burdens and, in some cases, weak banking sectors.
Every day reveals the economic damage and the price governments will have to pay to try to cushion the blow. Italy and Spain are already worrying about the affordability of crisis-fighting measures, spending considerably less than France or Germany. The Italian and Spanish deficits are likely to balloon since release from economic lockdown will be slow and piecemeal at best. Debt to gross domestic product ratios will soar. Italy’s will climb to 155 per cent next year, the IMF predicts. It could rocket beyond sustainable levels in the years afterwards if the economy flatlines and borrowing costs rise.
Such a prospect could persuade investors to dump Italian debt, pushing the country into a spiral from which it could be hard to escape. If Rome tightened its belt in a slump it would deepen the crisis and turn Italians fully against the euro and into the arms of the populists. The market sell-off would spread to other eurozone members. This is the apocalyptic scenario Mr Macron fears. It is closer to reality than some in northern Europe would care to admit.
For now, the pressure is contained thanks to the might of the ECB, whose asset purchases have suppressed borrowing costs — although Italy’s have begun to rise again. But the ECB’s €750 Pandemic Emergency Purchase Programme will be wound up later this year and regular bond-buying will be harder to sustain if a recovery gains traction in the north.
It would help if Rome tapped the European Stability Mechanism, the eurozone’s rescue fund. True, its loans would add to Italy’s debt pile. But they are cheap and they come with few strings attached. More importantly, they bring potentially unlimited bond-buying from the ECB should its other programmes have to be scaled back next year. But tapping the ESM has become a taboo. Matteo Salvini, leader of the Eurosceptic League, equates it with subjugation. The Five Star Movement, one of the governing parties, is against.
For these reasons European leaders will need to go much further to safeguard their cherished project when they meet for their video summit later this week. To relieve the pressure on the weakest members and give them the means to rebuild their economies, the eurozone needs to embrace the idea of mutual support.
Coronabonds are too emotive. But there are proposals for a time-limited recovery fund, with EU debt issued either on the back of member-state guarantees or the EU budget. Money would be paid out in grants but repaid according to the strength of a country’s recovery. Many details need to be worked out. There would have to be conditions. But the scale of this crisis requires a demonstration of exceptional solidarity. Without it, political support for the euro will evaporate.