Virus at the Heart of the European Economy

WHAT with a Brexit post-coital tristesse followed by the corona-virus catastrophe, the British media is spending even less time on European economic affairs than the minuscule usual. This is a pity because Covid-19 has not only detonated a massive crisis in the individual European economies, it has thrown the biggest of monkey wrenches into the EU as an organisation.

To state the bleedin’ obvious: in the midst of the biggest social and economic crisis the EU (including several progenitors) has faced since its inception in 1957, the organisation is totally paralysed. More accurately, the rich northern bloc of Germany, the Netherlands and Nordics has point blank refused to provide fiscal aid to the southern members most at prey to Covid-19, especially Italy and Spain.

Public support for the EU has fluctuated wildly since the 2010 eurozone monetary crisis, which saw Berlin impose massive austerity on southern Europe, in order to make sure the likes of Spain, Portugal, Greece and Ireland kept paying interest on dodgy German bank loans. However, a combination of Trump’s bellicosity to Europe, combined with the chaos of the British Brexit, has seen European public opinion temporarily cohere back around the fabled “European project”.

Until the virus, that is. Last week (March 26) all 27 EU leaders held a six-hour video conference to discuss an economic recovery package to deal with disruption caused by Covid-19. The outcome was a first-class political row as the Germans and Dutch vetoed the idea of creating a new, EU backed bond issue – effectively a device to fund a massive reflation of the EU economy in the wake of the virus shutdown. This pushed the cost of any economic recovery programme on to individual member states, a move which could effectively bankrupt Italy and Spain.

It has left many people in the EU asking: “What is the point of membership if the EU fails to act collectively during its biggest ever crisis?”

To add political insult to economic injury, the northern bloc members also closed the door to using the existing European Stability Mechanism (ESM) for a communal, virus bailout. Created in 2012, the ESM is an EU agency that (supposedly) provides loans to eurozone members or as new capital to banks that are in financial difficulty. The ESM has half a billion euros to lend, courtesy of a levy on EU member states.

In the end, after a lot of argument, the EU leaders agreed to let the ESM provide standby credit to those member states hardest hit by the virus – but with a big catch. The loans would carry interest and have to be repaid within five to 10 years. Given it will take at least a decade for economies to recover, this represents a big fiscal ball and chain, as hard-pressed taxpayers (those who recover from the virus) are going to have to come up with the repayments.

Understandably, this is not what ordinary European citizens think of as EU solidarity. Which explains why the Italians wanted a joint response involving a massive fiscal boost paid for by issuing new, pan-EU bonds collectively underwritten by the EU as an organisation, rather than passing the burden to individual states.

But the rich countries – or rather, the rich bourgeoisie of the norther bloc – were unwilling to bail out the southern states. We should note in passing, the reason these southern states are so indebted is that they are already in hoc to German and Dutch banks. And German financial capital will be happy to lend even more. But ultra conservative, deeply parochial German capitalism balks at offering its southern clientele an EU loan guarantee.

At first sight, this may seem contradictory. After all, the post-virus world will see an intensification of trade rivalries between the EU, US and China. There is an obvious advantage to German capitalism in boosting aggregate demand (though a collective bond issue) inside its protected European market. But the German big bourgeoisie (and with it, the huge German petty bourgeois middle class) is petrified it will end up paying Europe’s debts. So, no EU bailout. It remains to be seen if this strategy will work or in fact undermine the EU as an alliance.


This is not to say that the EU structures have been totally inactive. Some elements realise there has to be quick action before the virus-related shutdowns provoke recession and mass unemployment. European Council President Charles Michel, who chaired last week’s the summit, has already called for a new “Marshall Plan”. And the European Commission has lifted blocks on state aid, so individual member states can intervene to protect local industry during the lockdowns.

The biggest economic intervention so far has come from the European Central Bank (ECB), which is headed by Macron-supporter, Christine Lagarde. The ECB has announced a new programme of Quantitative Easing – printing money – to buy the bonds issued by individual member states. It has also lifted its cap on how many bonds it will buy from any single eurozone country. Note: this is not the same as issuing pan-EU bonds which are underwritten by the EU itself (meaning the solvent members like Germany and Netherlands).

Instead, individual EU governments borrow on their own and are liable for the debt. But the ECB is buying up some of those bonds in order to stop the price tanking. In the short run, this makes these bonds look secure. However, the moment the ECB stops buying, the Spanish and Italian government bonds will plummet in price, the interest on them will skyrocket and we will be facing a default situation. Fingers crossed.

The one other action taken by the EU in the current crisis is to unlock some of its existing budget in the Cohesion Fund. Essentially some of the 2019 underspend has been released and some of uncommitted 2020 budget brought forward. This is chickenfeed given the depth of the economic crisis. However, some of the more romantic supporters of the EU inside the SNP have claimed that Scotland – had it still been a member – would have benefited from this move. Possibly and possibly not. The real point is that this particular EU intervention is a rebranding of its existing budget – not new money. It is a pathetic diversion covering up the lack of collective intervention.


The weakest link in the fast-imploding EU economy is Italy. While the rest of Europe has made partial or whole recoveries from the 2008 banking fiasco, Italy’s economy has remained stagnant. The country’s debt position – at 135% of GDP – is onerous. The Italian banking system remains saddled with massive, non-performing loans. This was an economy hovering on the brink of collapse even before the coronavirus arrived.

And arrive it has. The four provinces in Lombardy that are most heavily affected by Covid-19 represent 12% of Italian GDP and (worse) 2% of the eurozone’s entire GDP. This output has now effectively vanished.

The bottom line is that any fresh Italian state borrowing aimed at reflating the economy could be the extra debt that implodes the banking system. Italy has only survived on its shoogly fiscal peg because – unlike Spain – most state debt is held by Italian creditors. They are not in any position to bail out the Italian government or Italian business, meaning Italy is about to be bought (lock, stock and wine barrel) by the Germans and Chinese.

Also, if interest rates are forced up even a little, all those zombie loans held by Italian banks will be exposed, bringing down the financial system. Italy is an accident waiting to happen.

We could say the same thing about the EU. Which is why those of us who consider ourselves both Europeans and socialists need to start thinking about how we rebuild European unity on the basis of solidarity rather than profit.

Comments (15)

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  1. Stroller says:

    Yes, I think Covid 19 could easily kill the euro, if not the EU though it ought to be said that both the Netherland and the Germans have been making much more conciliatroy noises over the last few days. But essentially George is right, the north of the Europe, just like during the last crisis, thinks that providing lots of cheap credit is the answer. It isn’t the answer.
    Almost 900,000 jobs were destoryed in Spain in the last two weeks in March alone, the biggest number on record…those are figures are from today.
    As much as 12% of Spain’s GDP comes from tourism…Easter is dead, the summer season is probably dead…
    The whole Spanish economy is going down the plughole and Sanchez’s governments measures are nowhere near enough…
    And Italy is in an even worse state than Spain…
    If this goes on much longer, anything could happen… eventually it will lead to a response from the long suffering Italian and Spanish working and middle classes…

    1. Stroller says:

      PS: It’s not the EU which is under threat, it’s the euro. The EU deficit and public debt rules have all been suspended, it is the inability to print money and pump it into their own economies which might make the Spanish and the Italians eventually think it is no longer worth it and go back to the peseta and the lira respectiveñy. But we’re still some way away from that time I think.

      But clearly the measures taken by the government in Spain are nowhere near enough. Example? The UK gov guarantess 80% of the annual earnings of the self-employed up to 2500 pounds for x months, the Spanish government on the other hand has promised a subsidy of 600 euros per month to those self-employed who have lost – wait for it – 70% of their earnings month to months.

      And it’s not automatic eitheir, the gov has given the State up to three months to decide on whether the applicant is eligible…It’s a joke…

      1. Stroller says:

        More than a measure to ameliorate the situation, the Spanish govt’s offer to the self-employed – who have to pay a flat monthly social security rate of 285 euros, no
        matter what they earn – is a form of torture. It’s a new form of torture which Nadia Calviño and Pedro Sánchez have come up with, to make everybody suffer more presumably.

        Get this George, to be self-employed in Spain, you have to fork out about 3200 euros a year, divided into 12 monthly payments, there is no other way of paying (say, by quarter or semester). If you’re one day late paying, there’s a 10% fine.

        To be self-employed in the UK, the flat rate (not linked to earnings) is about 180 quid for the whole year, maybe abit more, maybe 200 quid by now…

        This explains in part why Spain has such a high unemployment rate. It costs quite a lot of money to be self-employed which is especially offputting if you’re just starting. But the Spanish oligarchy are quite happy with an above average unemployment rate, it keeps wages and salaries cheap…

        Nadia Calviño (the minister of economy) said the other day that the govt have to keep collecting taxes and SS payments to pay the State wage bill. Unfortunately, and ery disappointingly for a Minister of Economy in a crisis as big as this, she doesn’t seem to realize that most Spanish people don’t have any money lying around either…and if they can’t work, how are they meant to pay for the State wage bill?

        1. Stroller says:

          The situation, ongoing in the eurozone for the last ten or so years, can be summed up as follows: the euro is a POLITICAL project as much as it is an economic one, and they do not appear to have the political will to fully and properly defend their project in the north of Europe, whereas in the south of Europe, for their part, they refuse to take public office seriously enough – in terms of corruption, in terms of tax evasion and in terms of reforming their economies, and in terms of the technical know how of their dreadful politicians – to be worthy of very much trust.

          Right now, there does not seem enough political will in the north of Europe to save the Euro, and in the south of Europe, in Spain say, where the former King Juan Carlos Borbon is being investigated by Swiss prosecutors for concealment of assets after he was found to have 100 million euros in a bank account, a gift from the former King of Saudia Arabia apparently, they still refuse to take corruption seriously enough to offer north europeans any kind of reassurance…

          For the euro to be undone by a plague is kind of biblical, but that’s what may well happen unless somebody starts showing some leadership. In Spain, for example, there ought to be a referendum on the monarchy….the Borbon monarchy is synonymous with corruption…with tax evasion, with swindling and stealing, it simply cannot be allowed to carry on as if nothing had happened…

          1. Stroller says:

            If you were inclined to, you might charcaterize the situation as a stand-off between the heartless, imbecilic and penny pinching North of Europe, and the shameless, incompetent and corrupt South of Europe…

            …the politicians of both sides make me feel queasy either because of their sheer brazen faced venality and sliminess, or else their utter stolid indifference and total insensitivty to human suffering…

            Let no one in Scotland forget in a hurry that former President of the European Commission Barroso came on to the BBC and LIED to the people of Scotland by claiming it was “almost impossible” Scotland would be allowed into the EU as an independent nation, despite Scottish tax payers having made contributions to the EU budget since 1973.

            So, why would anybody in Scotland trust the EU? Nobody in their right mind would trust any of these people, much less in a crisis.

            As for Nadia Calviño and the Sánchez and the Spanish govt, they have arrested and even imprisoned hundreds of people for breaking confinement in Spain. The Spanish self-employed are in lockdown, they cannot go out and work, they have no way therefore of earning money, and the Spanish State tells them they might get 1200 euros in about August if they’re lucky?

            Well, I mean, by any calculation, a good number of the self-employed will probably have starved to death by then…

            The Spanish State, and any State, has an absolute and categorical obligation to ensure all of its people have some form of income while lockdown is place. It’s that simple….

  2. Apricale says:

    This is seen as a huge problem here in Italy. The popularity of the EU had recovered after the Brexit fiasco, but Italy is beginning again to see Europe as being a club based simply on money, not so much on any underlying principles. The level of personal debt in Italy is low, it is the banks (and low growth) which have caused the problems (so “Moral Hazard” may apply to the banks, not the people. That’s probably true in many places). People also remember tha West Germany had half their debt written off in the 1953 London conference.

    The EU too often still behaves as a group of nations with a common financial interest, not as a real community. Coronabonds would not affect existing debt, but would be seen be seen by many countrias as a sign that there was something more to aspire to (“..a man’s grasp should exceed his reach, or what’s a Heaven for..). This idea of something greater should not be undervalued, the idea of some kind of common values motivates both the independence and unionist movements, and much of Brexit and remain; not the nuts and bolts of the economy.

  3. Roland Chaplain says:

    Thanks George for this analysis. Lots I didn’t quite appreciate beforehand ! That said, as someone who has been involved in futures studies for over half a century, I’m personally convinced that there will be no returning to the old ‘normal’. Our globalised system of trade and doing economics has been utterly exposed for the cash centralising wealth sham that it is.
    As with tackling the global climate and global ecological disasters, the solutions cannot and must not be predicated on systems and economic injustices that have been allowed (and by some cynically and selfishly encouraged) to happen. Covid-19 is so obviously a call to reconstruct our economic relationships in what ever ways needed to replace what will be growing numbers of systemic collapses in the face of more covids and more climatic tipping points.
    Lets be brutally frank about at least one simple fact. If all the efforts that have gone into war-mongering and arms manufacturing this century had in stead been going into all that health services now so desperately need we would not now be faced by the numbers that will die globally – potentially comparable to those in World wars.
    It looks like there will have to be a new world body to replace the UN that recognises the identities of nations, identities and languages. Such a body will have many, many more members. How else can a nation like Scotland, currently subsumed in the so called UK, or languages like Gaelic with their distinctive expression of our relationship with nature, contribute to a solution based on the strengths of diversity and local resilience.

  4. w.b. robertson says:

    Presumably our diehard pro-EC faction will still go on campaigning for a future Scotland to be independent within the EC. Getting free from WM is one thing, joining this Germany/France big business domination of “Europe” something frightening.

  5. Dougie Harrison says:

    Thank you for this George. Your usual perceptive analysis; something Scotland (and the EU) dearly needs in this strange virus-dominated world. The EU will be deeply affected, and may well have to amend itself painfully, if indeed the disparate political and virus-strengthened economic issues allow it to survive in any recognisable form.

    But whatever happens, in a world now dominated economically, politically, and militarily by the dominance of the USA and China, and the likelihood, whatever damage Modi is currently doing to the huge nation he now mis-leads, of continuing Indian growth; Europe including Scotland will require tp reform itself if it is to survive as the world’s largest collective economy.

    It’s fortunate indeed that Scotland still has a mind of your political and economic stature to help guide it in a sensible direction, in a time of global upheaval.

  6. Kevin Hattie says:

    I admit to being someone who never really gave much thought to the European Union before the referendum on the UK’s membership. The only thing that I related it to was the ease of travel between the member countries. When, all of a sudden, the EU became the central talking point of politics in the country, I looked at the different sides in terms of who seemed to support them. It was quite confusing seeing a split in the Tory party over this. I didn’t want to be on the same side as David Cameron or Boris Johnson and Nigel Farage. But I did notice some of the xenophobia coming from people who viewed the EU as a passport for Eastern Europeans to come to the UK. If I’m honest that is what soured me on Brexit. I did associate it with xenophobes and bigots.

    Since then, I have done some of the research I really ought to have done at the time. From what I’ve read so far, I absolutely agree with the sentiment in this article. There’s potential in a project that looks to create co-operation across Europe, especially if it is directed from below and is sensitive to the needs of working people. But from what I gather, the EU is far from realising such potential. While I’d still feel more comfortable in the EU than in Nigel’s Britain, I’d distance myself from the cheerleaders of the organisation, who want to stay part of it and keep it largely as is. I totally agree with your parting comments: we do have to start thinking about a rebuild in terms of European solidarity. It is worrying to read about the current state of affairs that could lead us even further away from achieving this.

  7. Daniel Raphael says:

    Interesting and informative. I realize this wasn’t written as any sort of validation of a Brexit, but I do think a number of the core observations you’ve made strongly suggest the case for a Left version–not the calamity that is unfolding now. Of course, it’s moot, since the calamity (calamities) is upon us, and as with everything else the Tories touch, it is the worst-case version, a textbook in how not-to-do-it.

    The problem is the hilariously named “free market,” which the EU pretends to embody and uphold…but which your article very nicely exposes in its very controlled and controlling reality. The Greek people know something about the joys of German bankery and capitalist wankery, twined as they are; the taste for blood is a preference for sharks, but the real-life traumas played out in the process of paying out to well-off burghers is also suggestive of exsanguination. I keep wondering just how far the current crisis will have to devolve before there is massive uprising. Any bets?

  8. Alister Rutherford says:

    I find this a very unconvincing article. Yes there are tensions within the EU. Always has been, because the EU is a union of independent countries, unlike the UK. Discussions on Eurobonds has only begun. To take the first discussion as the definitive response is a bit precipitous. Some people have been continuously predicting the collapse of the Euro since before it even started. Same with EU.

  9. Roger Gough says:

    “The ESM has half a billion euros to lend…..” Small beer when one remembers that the EU gave Turkey (not loaned) at least Three billion Euros to help finger the dyke of that other disastrous EU policy; the migrant free for all. When asked how they had spent the first 2 million tranche of the gift, Turkey said that such details were subject to strict data protection and wouldn’t be released. Pardon my smirk.

  10. florian albert says:

    George Kerevan’s analysis is sound but it is mostly an economic analysis of a problem which is – as ‘Stroller’ points out – political.
    German voters were reluctant to abandon the mark for the euro. To persuade them, they were guaranteed that it would not lead to Germany being required to bale out weaker economies. If Germany acts to ‘cover’ Italian debt, there is a real possibility that there would be a revolt against it by German voters. The official opposition in the Reichstag is the populist AfD.
    If Germany fails to act – as seems likely at present – the results for the economies of Italy and other countries will be dire. The economist, Stephen D King, has said that it the first fifteen years of the euro, Italian living standards went from 90% of Germany’s to 75%. Thus the EU had ceased to a vehicle of convergence and become the opposite.

    There does not appear to be enough solidarity to sustain the European project.

  11. SleepingDog says:

    There is a difference between the EU framework and the present behaviour of the representatives of members of the EU. In one sense, the EU is about standardization, which should be a be of considerable benefit in crises/emergencies/existential struggles (where the things you need are therefore interoperable). If the logical response to global threats including pandemics is to restructure the human world along cellular lines (where each cell has the means to independently sustain its own existence and contribute to the health of all others), then the nation is currently an unsatisfactory cell within the EU regional framework.

    To give a flavour, think of how the hexagon grid of Civilization gets organized, with cities like the nucleus of their own cells made up of contiguous smaller units, while in turn each city owns its allegiance and contributes to a faction (or in some cases is a independent city state). While a vastly simplified model, it shows how straightforward management and monitoring can be with this arrangement.

    So perhaps larger national economies could be chunked and larger national geographies subdivided into provincial cells, with resources redistributed to support provincial refactoring into a semblance of a sustainable economy with a high degree of self-sufficiency. This could be done at the same time as old and polluting/corrupting industries and sectors are closed down and phased out. In a global sense, each bordering cell will be both buffer and source of emergency aid, and it is in the interest of each to support, monitor, improve the others, no longer in wasteful competition. The EU or its replacement would be one of several aggregates of cells worldwide.

    I would say something along these lines would probably be necessary to avoid the cascading failure of human civilization, but obviously require a new form of politics.

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