Debt Crisis, Brexit, Now Virus. Can the EU Survive?

(Bloomberg) -- The European Union is in crisis, again. Effectively the world’s third-biggest economy, the 27-nation bloc is struggling to muster a united response to the deepest recession in almost a century unleashed by the coronavirus. Old divisions have resurfaced and legacies of past crises are threatening to pull it apart. While this isn’t the first time the EU has faced an existential threat, German Chancellor Angela Merkel says none has been as serious as this one.

1. Why is the threat so great this time?

Having forecast the biggest decline in regional output since World War II, the European Commission warned that the unevenness of contractions and recoveries country-to-country will put at risk the survival of the euro area. The common currency bloc, encompassing 19 countries, is at the core of the European unification project but lacks many of the tools that regular economies can deploy. There’s no common treasury to direct funds where they are needed and, so far, little agreement on proposals to help out poorer nations. Less wealthy southern members are demanding more financial support from their richer peers but without the strings that are typically attached. Wealthier nations, who have long seen themselves as being asked to bankroll profligate southerners, are resisting.

2. What else is shaking European unity?

A court ruling in the EU’s most powerful state. Germany’s constitutional court in early May disputed the legitimacy of the European Central Bank’s sovereign bond purchases program, possibly limiting the bank’s firepower in the future. Potentially more damaging, the ruling challenges the authority of the European Court of Justice as the ultimate arbiter in the bloc. The German court’s rejection of an ECJ ruling may embolden others to make challenges, including the illiberal governments in Eastern Europe that have sought to upend the EU’s core principles of the rule of law and of checks and balances. The German ruling thus raises risks for the entire legal order in the EU and for the first time begs a fundamental question: If EU law doesn’t take primacy over national law, how can a single market and a single currency extending beyond national borders function?

3. Isn’t the EU always in crisis?

Regular predictions of its demise have proved greatly exaggerated. In the past decade alone, a sovereign debt crisis almost led to the disintegration of the single currency. An immigration wave in 2015 found the EU equally unprepared, as the arrival of refugees totaling some 0.2% of the bloc’s population caused panic in governments. A year later, the U.K. stunned the world by voting to leave the bloc, while a surge in support for populist leaders across the continent produced new prophecies of doom. The EU has managed to survive each blow, bruised and battered, but muddling through no less.

4. Why so many crises?

One popular theory is they’re interconnected, with each crisis feeding into the next and leaving a legacy of unresolved issues while exposing the institutional shortcomings of the European project. Former EC President Jean-Claude Juncker called it a “polycrisis.” For instance, the euro area shares a currency but not a proper common budget, the single market is incomplete, capital markets are fragmented and a long-running push for banking union remains unresolved. Decision-making is complex: Only the commission (the EU’s executive arm) can propose legislation, but the main legislator is the Council of the European Union, consisting of national governments, which can only take decisions by unanimity or a large majority. Approval for most decisions is needed by the European Parliament, a fragmented group of directly elected lawmakers chosen by proportional representation from member states. Support of several political factions is required to garner a simple majority.

5. Is there a common thread to the challenges?

In a word, sovereignty. National governments answer to their own voters and need to abide by national constitutions, parliaments and procedures, which in essence undermines efforts to make strategic decisions about the bloc as a whole. In late February, just as the coronavirus was beginning to wreak havoc across the EU, its leaders spent 28 hours bickering over fractions of a percentage point of the bloc’s relatively small budget, many keen to show how they defended national interest above all. Because of such division and the need for unanimity or sizable majorities, decisions are usually taken on the basis of finding the lowest common denominator. In short, the EU’s setup does not lend itself to handling urgent and complex crises.

6. How bad might things get this time?

Bad enough for Merkel and France President Emmanuel Macron to make dire warnings. Past experience shows that EU leaders will do just about enough to salvage the situation and avoid the worst, according to Janis Emmanouilidis, a Brussels-based analyst at the European Policy Centre. Doomsayers have consistently underestimated the political will of Europe’s establishment to keep it together, but doing only enough to avoid implosion, and only after all other options have been exhausted, may not be a viable strategy in the long term. The EU’s share in global economic output has been shrinking, the bloc has been unable to display foreign policy muscle and appears increasingly squeezed between the U.S. and China. Critics warn that if the bloc’s leaders keep defending petty interests, the EU may end up becoming ever more irrelevant and, as the poet T.S. Eliot once put it, will end “not with a bang but with a whimper.”

The Reference Shelf

• QuickTakes on coronabonds, banking union, the euro’s flaws and the “Brussels effect.”
• The EU’s biggest existential threat yet?
• An explainer on the German court ruling.

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