(Bloomberg Opinion) -- On Thursday, the European Union’s leaders will gather to decide on a joint response to the economic crisis caused by Covid-19. The central question will be whether the euro zone is ready to issue some form of mutualized debt to relieve pressure on the bloc’s most fragile member states.
The chances of anything resembling so-called “euro bonds” are extremely slim. Germany and the Netherlands have made it clear they oppose such “joint and several” liabilities, as they fear they’d be on the hook for the costs of the crisis. While France and Spain have made concrete proposals on some type of joint debt, they’re unlikely to push their cases to the extreme. The French president, Emmanuel Macron, regularly offers rousing words about the need for common action, but tends not to follow through.
That could have left Italy in a very awkward spot. Prime Minister Giuseppe Conte has tried loudly to convince countries in northern Europe to change their minds on euro bonds, or coronabonds as some people are calling them. He’ll now need to decide whether to veto an EU deal that doesn’t include them. However, Conte too looks likely to fold.
Two weeks ago, a meeting of euro area finance ministers agreed on several instruments to fight the crisis. These include: cheap credit lines from the European Commission and the euro zone’s rescue fund to help countries support their labor markets and health systems; new guarantees from the European Investment Bank; and a vague commitment to some form of reconstruction fund, to help the most fragile member states after the acute phase of the crisis.
That last part of the agreement is the most controversial. Conte had said he expected the single-currency region to move to fully fledged euro bonds, even though he never specified how the bloc would get over the legal and administrative obstacles. Spain and France were more precise. The French would like EU nations to set up a joint financial vehicle worth 3% of the bloc’s gross domestic product, which would distribute its resources depending on a country’s need. The Spaniards believe the EU should establish a fund, worth between 1 trillion euros and 1.5 trillion euros ($1.1 trillion and $1.6 trillion), to be paid for via perpetual debt. The fund would pay the interest on these loans using new EU-wide taxes, including carbon levies.
Either scheme in their present form will almost certainly be opposed by the Germans and the Dutch. Yes, Chancellor Angela Merkel is paying lip service to the idea that this week’s meeting should go beyond what the finance ministers agreed. But she doesn’t want to change the European treaties. That’s a major problem for debt mutualization, since the existing agreements stop member states from bailing each other out. Germany might agree to the Commission borrowing more to fund countries in need. It’s not clear whether Merkel believes these payments would be loans or grants; it seems unlikely that Berlin will be in favor of simply handing out cash.
Conte had put himself in a seemingly impossible position. For weeks, he raised expectations at home that he would only accept radical measures such as euro bonds. But on Tuesday, he appeared to row back. He said Italy was willing to support the Spanish and French plans, and had produced a watered-down proposal of its own, also based on the EU budget. His coalition government is divided, as the left-leaning Democratic Party wants to compromise with the EU, while parts of the populist Five Star Movement are taking a hard line. Still, the impression is that no country has the appetite for a dramatic showdown.
France will be important. In an interview with the Financial Times last week, Macron was forthright about the need for more cross-border solidarity. But we’ve been here before with the French president. Two and a half years ago, he gave a rousing speech at the Sorbonne University in Paris on the need for a joint euro zone budget. France then entered long negotiations with Germany, but the resulting Meseberg declaration fell far short of what Macron had hinted at.
Since then, the euro area has agreed only to a more flexible use of its rescue fund, the European Stability Mechanism, and a small budget that cannot be used to help countries facing a lone shock. France’s usual approach seems to be trying to push Germany to the limit, but then caving in to what Berlin wants.
In theory, Spain could team up with Italy and other southern European states such as Portugal to revolt against the north. But there are few signs of Prime Minister Pedro Sanchez pursuing that path. Spain’s problems are less urgent than Italy’s, since its borrowing costs are much lower. Madrid can also play a longer political game, eyeing a chance to take Italy’s seat at the euro zone top table as the third power behind Germany and France. Conte’s unpersuasive strategy will give Sanchez another chance to portray himself as the more sensible negotiator.
As the Covid-19 crisis continues to ravage the economy, Germany will face profound strategic questions over the extent of its support for the monetary union. However, other countries should be under no illusion that they can bounce Berlin into anything. Germany’s economic primacy looks set to strengthen in the crisis. Inevitably, its political might will grow too.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Ferdinando Giugliano writes columns on European economics for Bloomberg Opinion. He is also an economics columnist for La Repubblica and was a member of the editorial board of the Financial Times.
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