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COVID-19: The EU has failed a test of solidarity

Updated: May 15, 2020

The price will be more austerity - and worse

by Duroyan Fertl

Photo by Maryna Yazbeck, Unsplash.

The European Union (EU) has been tested over its response to the COVID-19 pandemic - and it has been found sorely lacking. The resulting lack of vision, of solidarity in times of crisis, raises fundamental questions about the long-term viability of the bloc.

As the economic crisis caused by COVID-19 deepens, we have now entered the worst downturn since the Great Depression. The economic and political consequences are already massive – and will continue to grow.

In the space of just one month, International Labour Organisation predicted worldwide job losses grew from from 25 million to 305 million, with working hours lost equivalent to 124 million full time jobs in the first quarter of 2020 alone. By contrast, the crash of 2008-2009 led to the loss of approximately 22 million jobs worldwide.

The global economy was already heading into a downturn when the latest novel coronavirus struck. But it is now experiencing a unique crisis, one reaching deep into the productive sector and challenging established orthodoxies.

Panicked economic and social lockdowns to contain the pandemic have ground much production to a halt, while consumption has also shrunk massively. With millions now working from home, and millions more frontline workers all but sacrificed to the market, the logic of capitalist production and social organisation doesn’t seem quite so “logical” any more. The EU sits perched on a cliff-edge.

The first responses in Europe were largely national, focusing on border closures, social lockdowns, and – eventually – widespread industrial shutdown. The border closures – an assault on a symbolic key “pillar” of the EU – eventually brought an open rebuke from European Commission President Ursula von der Leyen.

Some countries cushioned the immediate shock for workers and industry with subsidised wages and corporate bailouts. But when the pandemic hit Italy, its cry for help was all but ignored, except by China and Cuba. Italy’s ambassador to the EU, outraged, warned that Europe’s leaders risk “going down in history like the leaders in 1914 who sleepwalked into World War I”. It was beginning to look like “European solidarity” was an idea for fairer weather.

The EU eventually stumbled into action. With only a belated series of reactive and short-term measures, bungled announcements, political shadow games and abortive grand schemes, none of them equal to the scale of the problem.

When the European Central Bank (ECB) announced measures to ensure liquidity in the financial and banking sector, they were almost undone the same day when its president, Christine Lagarde, declared the bank was “not here to close spreads” in sovereign debt markets. The statement spooked markets, angered Italy, and serious cast doubt on whether the ECB would provide the necessary support to member states.

The bank’s follow-up measure was the 750 trillion euro Pandemic Emergency Purchase Programme (PEPP), allowing the ECB to purchase more large amounts of sovereign debt, thereby enabling greater public debt and heavy government spending.

This was combined with looser state aid rules and temporary suspension of the austerity-imposing Stability and Growth Pact (SGP). This limits budget deficits to three percent of economic output and debt to 60 percent. The looser rules were unprecedented in scope, arresting an alarming sell-off of risky eurozone debts, but they were also short term and woefully inadequate, and the market gains were short-lived.

The debate over a lasting “pandemic crisis support” tool quickly evolved into a high-stakes political showdown. Longstanding divisions over the future of European economic and political integration took centre stage. All confining the needs of half a billion working people to a mere afterthought.

Leaders of more fiscally conservative countries, like Germany and the Netherlands, insisted that any response rely upon the European Stability Mechanism (ESM), the EU’s 410 billion euro bailout fund. While the ESM allows eurozone members to draw a credit line worth two percent of their economic output, these loans come with strict “conditionalities”. Designed – and badly so – for the sovereign debt crisis of a decade ago, the ESM is especially unsuited to the current crisis.

Nine EU governments, including Italy, Spain, Portugal and Greece – rightly associating the ESM with damaging and brutal austerity policies – instead proposed a common debt instrument via special eurozone bonds. Dubbed “eurobonds” or “coronabonds”, these would spread debt across the eurozone and facilitating government borrowing, while avoiding – supposedly – crippling national debts and austerity.

All the debt would be rated equally, and would not be included in national accounts. This idea represents a significant step towards a full monetary and fiscal union in the eurozone – and is widely supported in southern Europe. The ECB President Lagarde, her predecessor Mario Draghi, as well as numerous economists, have lent support to the idea.

Superficially, the coronavirus crisis is ideal for eurobonds. It is an example of an “exogenous shock”, where “moral hazard” arguments (i.e. of not rewarding supposedly “profligate” governments with cheap credit) shouldn’t apply. There ought to be no "moral risk" in helping Italy or Spain to run huge deficits to fight COVID-19 and the economic crisis it has caused. After all no one “blames” Italy or Spain for the current crisis the way Greece was blamed – wrongly – for theirs. It’s difficult to moralise during a pandemic.

Orthodoxy prevails

Unmoved, Germany and the Netherlands maintained their rejection of eurobonds or any similar instrument. They were unwilling to accept shared debt without the power to impose further structural reforms on weaker economies. This also stems from domestic considerations, as eurobonds would signal the transformation of the EU into a “transfer union”.

The institutional framework of the EU and eurozone have granted Germany, the Netherlands and others, significant economic and strategic advantages. These contribute to systemic divergence across the bloc. But a union that encouraged the levelling out of wealth within the EU would diminish some of these German and Dutch gains, even while it would strengthen the position of countries like Italy, which has gone backwards after 20 years in the eurozone.

Ironically, in Italy, if debt servicing (which is the primary deficit) is excluded, then the difference between government spending on day-to-day running costs and total tax revenues – has been running a fiscal surplus almost continuously since 1992. But Italy is trapped in an endless “debtors prison” – its wealth has been funnelled wealth northwards to creditor countries.

The average public debt for the eurozone late last year was 86%. Yet for those states heavily hit by the 2010-12 debt crisis the level remains much higher, despite regular, sometimes crippling, repayments: nearly 180% for Greece, 137% for Italy, 120% for Portugal, 100% for France and 98% for Spain.

The accompanying austerity measures have devastated public services and weaken member states’ ability to respond. In one poignant statistic, a recent report commissioned by the left in the European Parliament found that between 2011 and 2018, the European Commission explicitly demanded member states cut spending on, or privatise, healthcare services a total of 63 times.

While Italy and Spain continued to reject the ESM and its inevitable austerity within the European Council and Eurogroup, the Dutch and Germans dug their heels in. Italy’s Prime Minister Giuseppe Conte made his case plainly: “if Europe does not rise to this unprecedented challenge, the whole European structure loses its raison d’être”. Meanwhile Portugal’s Prime Minister António Costa accused the Dutch Finance Minister of threatening the future of the EU, but Germany’s Angela Merkel and Dutch Prime Minister Mark Rutte refused to budge an inch.

Even Ursula von der Leyen openly supported the German position, backtracking when realising that she made the Commission appear little more than a proxy for German conservatives.

A French attempt at compromise – a one-off fund to raise debt and issue government loans while referring vaguely to future “innovative financial instruments” – was also deemed too much. A more sensible proposal from Spain – to fund spending through perpetual EU debt and grants – was barely acknowledged.

Ultimately, Italy and its allies caved, and the hardliners prevailed. So the ESM would be the mechanism for “helping” affected member states, alongside a proposal to beef-up the coming 2021-2027 Multi-annual Financial Framework (MFF) – the EU’s seven year budget.

The proposal would also redirect further much-needed funds from existing cohesion policy funding. Yet MFF negotiations are deadlocked, with current funds running out at the end of the year.

It was suggested that vulnerable member states should pay in additional billions of euros, effectively guaranteeing loans to themselves. But this is also unsustainable at a point when many economies are rapidly contracting. Such an approach can only lead to a continued dependence on ESM loans and an increase in suffocating sovereign debt.

Finally, claims that the ESM credit lines would be without conditionalities were also misleading – access to the loans will be, but the loans themselves will still be subject to oversight.

The Commission also flagged plans to raise 320 billion euro on the markets in order to “leverage” further funds. This old parlour trick was used repeatedly, and unsuccessfully, by EU institutions to “mobilise” private investment off the back of public funds.

Despite further claims that the Commission could “generate” 2 trillion euros, the April 25 European Council meeting ended with a mere “declaration of progress”. Consisting of vague commitments to a Recovery Fund linked to the MFF, but without agreement on size, structure, nature, or sources of funding. Responsibility for a final proposal was hand-balled to the European Commission to make at some at a later date.

Details were thin, but the direction of travel was clear – eurobonds were off the table, and orthodoxy prevailed. The response required is a massive increase in member state public spending without worsening public deficits in already-stressed member states or pillaging more public services. This poses a significant problem for the EU, which remains wedded to a self-imposed monetarism enshrined in its guiding treaties.

Of the four new instruments that had been agreed to combat the crisis, the vast majority come in the form of loans or guarantees. They are still subject to the EU’s “economic and fiscal coordination and surveillance frameworks” – to the inevitable demands for repayments and austerity measures, underpinned by the SGP.

And eurozone governments will almost certainly need to finance their massive spending increases through borrowing. They are unlikely and largely unwilling, to raise sufficient funds to address the crisis through taxation. Further they are restricted from following the likes of the Bank of England in direct monetary financing – not by any universal rule – but by the self-imposed and dangerous ideological constraints of the EU and eurozone, and a thoroughly unaccountable ECB allergic to inflation.

While stagnation is currently a greater threat than inflation, the mandate of the ECB prevents it from taking the necessary steps – even if it wanted to. The institutions are hamstrung by their own incoherence and ideology.

Even EU actions as banal as quantitative easing are coming under attack. The German Constitutional Court recently heard a case against the ECB’s Public Sector Purchase Programme (PSPP) – precursor to the PEPP. The case alleged a breach of EU law, supposedly harming German taxpayers by providing assistance to Italy.

Using shoddy legal – and worse economic – arguments, the German court ruling on May 5 effectively set aside the European Court of Justice’s decision in support of the scheme, and issued a “please explain” notice to the ECB.

The ruling not only sets a bomb under EU law, it also places the ECB’s response to the new economic crisis in doubt. True the ECB immediately insisted its schemes were proportionate. But if Germany’s Bundesbank – the largest shareholder in the ECB – withdraws from the bond-buying scheme, it will further spook the markets upon which the EU response depends and nip the stimulus in the bud.

COVID and Consequences

The outcomes will be as political as they are economic, bringing further “integration” through debt, with national budgets under increased central control from Brussels, and creating a defining crisis for the EU and the euro.

As the COVID-19 death toll continues to mount, the prospect of another generation of indebted servitude, austerity politics and enforced poverty even led some member states governments to threaten independent action. In other words a direct challenge to the integrity of the eurozone. Before his capitulation, Conte declared that Italy – in its worse crisis since the Second World War – would rather go it alone than accept loans under the ESM with further disciplinary terms.

There is now mounting concern that support for the EU in Italy is lost. A survey in March found 67 percent of Italians believed being in the EU was a disadvantage, with many feeling abandoned.

Italy may end up with a compounded debt burden, high unemployment, and low growth – along with no fiscal sovereignty and the trauma of over 30,000 dead from coronavirus. That will be fertile political ground for the neofascist and far right, whose combined support is already at 40 percent.

In France, where polls show 70 percent believe the government has botched the response, the far right senses blood too, and similar conditions are not so far away in the Spanish state.

The EU has a habit – some might say a skill – of “muddling through” crises, suffocating change while deflecting the costs onto ordinary people, and it is unlikely that Italy or others will make any sudden moves unless backed into a corner.

This is – after all – not a fight of the Netherlands and Germany against Spain and Italy. But it is a contest between their various elites over the future shape of the European project. If they can avoid such a calamitous break, they will.

Recent history shows that to cross the EU institutions unprepared will only bring fresh, unwelcome, punishments. In recent years, even Italy’s eurosceptic populist Five Star Movement and the far right Lega have moved away from their calls to exit the euro.

The instability in Italy and other “southern” member states is also not the only major challenge facing the EU. Increasingly authoritarian governments (eg Poland, Hungary and several other former East Bloc member states) are intensifying their campaign against human rights and freedom of speech, and dismantling the rule of law under the guise of defence of national sovereignty.

In Poland, the ruling Law and Justice party has undermined the judiciary and the separation of powers, and continues to attack reproductive and LGBTI rights. Meanwhile – using the COVID-19 pandemic as a pretext – Hungary has accelerated its already concerning slide away from democracy by adopting an emergency law that allows Prime Minister Viktor Orbán’s to rule by decree indefinitely.

Despite these governments repeatedly breaching so-called “European values” – including attacks on the rights of journalists, minorities, refugees, civil society organisations, and more – the EU has long delayed taking effective action.

In large part, this can be explained by the political weight these countries have brought the centre right at a European level, helping strengthen the conservative pole across the EU. While Hungary’s ruling Fidesz party was suspended from the mainstream European People’s Party – the largest political grouping in the European Parliament – it remains a member, despite repeated calls for its expulsion.

More trigger-happy critics are also constrained by the fact that while Article 7 of the EU Treaty allows for countries to be suspended from the EU for rights breaches, they cannot be expelled. This makes the loudest threats to eventually prove hollow.

The EU’s belated response has also been seriously undermined by the double standards already being applied from one country to the next. While the EU has initiated disciplinary proceedings against Hungary and Poland, no such moves have been taken against western EU states who have breached these same values. The impunity of state violence against “yellow vest” protestors in France, for example, and the collusion of judiciary and police violence against Catalan independence supporters in the Spanish state, undermine the EU’s dubious claim to evenhandedness.

It should therefore be no surprise that within hours of the German Constitutional Court’s transparently political ruling on quantitative easing, the Polish government used it to justify its own disregard for EU law. Without resolving these contradictions, EU moves to “discipline and punish” such member states will be as counterproductive as eurozone economic policy, and the situation will only worsen.

The neoliberal “centre” of the EU is therefore walking the same flimsy tightrope, that similar forces fell from in previous generations. An economic strategy of ever-worsening austerity and privatisation, while refusing to allow progressive – even just Keynesian – alternatives, will leave the stage wide open for a populist resurgence on the far right. While the far right has – so far – failed to capitalise on the crisis, this is unlikely to last once the new wave of austerity hits.

Unless progressive forces can regain lost political capital and champion the fight for an alternative, there is the risk of – if not a far right-led exodus out of the EU – then the creeping growth of a more authoritarian style of capitalism. This means greater surveillance powers, more “Fortress Europe”, and further diminished workers rights at its core.

This is a defining moment for our generation – and for many to come. The EU and its institutions are not fit for purpose. They are incapable of responding to the social and economic needs of the majority, and working instead for the interests of billionaires and multinationals.

Many economic and political taboos will therefore have to be broken if we are to address the ballooning social, economic and environmental crises in an equitable, sustainable, and just way.

A deep social and economic transformation, including the radical extension of participatory democracy and meaningful solidarity, is required to avoid working people once again being made to pay the price of saving capitalism from itself, while the private sector continues to profit at the public expense.

The COVID-19 crisis – by bringing the issues of public healthcare and services back into the spotlight – already makes a compelling case for a radical reorganisation of our economic and social system on a daily basis. Progressive forces have both the opportunity and the urgent responsibility to build on this, to put forward and win support for a genuine alternative.

The sobering reality, however, is that despite the crisis, the structural forces and institutions of capital remain strong, while the progressive forces – unions, parties, working class institutions – are still recovering from years of collapse and disorientation.

Such a far-reaching post-pandemic transformation will therefore require sustained analysis and renewed levels of social organising if forces for change are going to take advantage of the opportunities this crisis provides.

Duroyan Fertl is a Political analyst, and former Political Advisor for Sinn Féin and GUE/NGL in the European Parliament. This article first appeared on the Telesforo Monzon Website. Reproduced with the author's permission.

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