Francisco Coll Morales // 11 April 2020

In recent weeks, the global impact of the coronavirus has brought a huge number of new questions to the fore. For the time being many remain unanswered but, as often happens, in some cases a lack of answers in itself can direct us towards the heart of the problem. This is the case with the European Union. The mechanisms of the European Central Bank are still insufficient to alleviate the current situation.

It cannot be denied that the scenario we are discussing is immensely challenging. The coronavirus has taken over the planet and has disrupted forecasts for the international economy. The high rate of infection, as well as the high mortality shown in Spain and Italy (and now the US), has ensured the lockdown of citizens almost globally.

The economic risks are incredibly severe. Faced with the general confinement as implemented in the current state of emergency, the economy is completely paralysed. With the exception of some sectors that have to remain active and under abnormal production levels, the majority have been locked-down entirely and will be unable to reopen their doors until the curve of infections is flattened.

This situation is of concern to European countries, both collectively and individually. The losses are already being counted in the billions for European economies. The Vice-president of the European Central Bank himself, Luis de Guindos, has already confirmed, in several meetings, an economic recession in the EU. A recession that is also expected by countries such as Italy, Germany, as well as many others; not Spain, of course, where the finance minister continues in her mission of encouraging society, generating hopes for a quick bounce-back before the end of the year.

In response to the crisis, and with recession inevitable, governments in the various countries that make up the European economic bloc have already begun to put pressure on Brussels. Applying expansionist economic policies in this situation may seem like the solution, but the permanent accommodating policies that the ECB had been implementing with its quantitative easing plans (QE) have caused such a drain on the mechanism that, in the current situation, the latter’s impact on the economy is now barely noticeable.

The European economy has been sedated. At the moment this means Europe’s capital available for policy implementation—with the ECB’s balance sheet full of sovereign debt and interest rates already breaking the 0% floor—has remained negligible. Given the situation, it is this lack of working capital that is preventing policy implementation and, more importantly, is having a significant impact on the economy. It is this situation that has led countries to look for alternative measures that are “bolder” and more effective to stimulate the economy.

These proposals, up to now, have focused on the harmonisation of European debt, introducing—by now infamous—supposed Eurobonds to the market, or as they are now called “Coronabonds”. This would mean that as an economic bloc the EU would have a debt instrument that would be far more effective than conventional policies currently at its disposal. Not everyone feels the same way. The Netherlands and Germany, for example, have already announced their outright rejection of the proposed measure.

The obvious reality is that, despite forming an apparent unitary and cohesive economic bloc, the EU has huge imbalances within its internal structure. To begin with, the financial discipline exercised by member states is not uniform. We are talking about harmonising debt, which would mean pooling the debt of all European countries in order to issue joint instruments. This a policy which, on paper, might seem fair, but in practice does not meet the needs of all member states.

The member states in favour of the measure include Spain, Italy and France. These three economies, whilst requesting European bonds and the unification of European debt, are also the same countries that, hold a large percentage of the total European debt. Spain, France and Italy have debt levels of more than 100% of their respective GDPs.

Germany, with government debt currently at 61% of GDP, and the Netherlands, with 49% of its GDP in debt, have flatly refused to join any joint Eurobond/Coronabond proposals. This decision has them cast as the villains in the current narrative, a judgement that is more than unfair; these are countries that have long exercised a fiscal discipline that none of the three requesting countries have shown.

The solution sought by Spain, Italy and France burdens those countries that currently have the lowest level of debt with the greatest level of risk. This is at the heart of the refusal of the Netherlands and Germany to support Coronabonds.

Germany and the Netherlands are protecting the legacy of years spent exercising fiscal discipline from the economic demands of countries who have not done the same.

This article was first published in Spanish by Civismo. The translations was conducted by Louis Kill-Brown.