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.
WHAT ACTION HAS THE EU TAKEN?
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.
ITALY’s SHOOGLY PEG
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.