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Survival test for a united Europe, or how much the crisis threatens European future

Author:

01.05.2020

The increasing number of countries lift off the COVID-19 restrictions throughout the world. But even if there is no second wave of the disease, no one expects the world economy to recover quickly. The world is caught in the worst crisis since the Great Depression of 1929 and World War II - economic, financial, as well as social, cultural and even sports. Logistics and trade chains are disrupted, a wave of bankruptcies and unemployment has affected millions of people, a complete or partial collapse of many national health systems and confusion among those responsible for education. Few people doubt that the consequences may well lead to the growing social discontent, nationalism, populism and political instability. The latter, in turn, may also result in the collapse of unions that previously seemed almost indestructible.

 

Resuscitation attempts

According to experts, the European Union will suffer most from the current crisis. IMF and EC predict a 7% decline for European GDP, while the European Central Bank claims the figure to reach even 15%. That’s why the European countries are frantically looking for a way out. However, truly effective anti-crisis measures require unity, which the supposedly united Europe never had before. The coronavirus pandemic only exacerbated all differences and systemic shortcomings within the union. Many are afraid that if economically weak European countries do not receive assistance, the EU may expect an inglorious end. For example, the Italian population, which suffered the most from COVID-19, has more Euroskeptik supporters than ever before. French Minister of Finance and Economy, Bruno Le Mer, openly stated that the imbalance between the strong and the weak will speed up the “end of the European body”. The speaker of the German Bundestag, Wolfgang Schäuble, believes that in order to maintain the chances of survival, Europe must prove its solidarity and legal capacity. And even billionaire George Soros warned that the new coronavirus would jeopardize the existence of the EU if the bloc did not take urgent measures.

To save the EU economies, on May 18, Germany and France, the two largest countries of the bloc, jointly proposed the creation of European Recovery Fund, which will be funded through EU  bonds (coronabonds). European Commission will distribute 500 billion euros as subsidies (grants) and in accordance with the EU budgetary rules. Specific projects should be developed to help the most affected countries and sectors of the economy, especially automotive, aviation, tourism, gastronomy and the event industries. At the same time, the debts will not be repaid by individual countries that received assistance, but by funds from the EU budget in proportion with the economic power of individual EU member states. For example, in case of Germany, Europe’s most powerful economy, this is about one fifth, or 100 billion euros of the total amount. Thus, it turns out that the main burden will fall on more or less stable countries.

Many European commentators claim that Macron pressed on Merkel on the issue of coronobonds, as the German Chancellor has always opposed Eurobonds and supported the strictest budget policies.

In early May, the German Constitutional Court adopted a decision that severely limits the ability of Germany to participate in programs to buy bonds of the European Central Bank to stimulate the economy of the Eurozone. However, the EU Court in Luxembourg promptly ruled that it was the only court that could assess the conformity of the actions of EU institutions with European law. Therefore, Merkel decided to show her commitment to European solidarity. She was supported by Armin Laschet and Friedrich Merz, two leading candidates for the post of the next CDU leader and, possibly, chancellor. The support of Merz, who is called the ‘fiscal hawk’, and Wolfgang Schäuble means a lot. However, German centre-right politicians – conservative factions in the Merkel-led Christian Democratic Union - have already declared their opposition. Therefore, Merkel hastened to reassure them by stating that coronobonds are a one-time tool with a limited duration. Nevertheless, European deputies already demand the introduction of a 2 trillion Euro ‘stimulation package for the economy’…

Austria, Denmark, the Netherlands and Sweden declared their rejection of the plan proposed by France and Germany under the informal leadership of Austrian Chancellor Sebastian Kurtz. They call themselves ‘financial conservatives’, or the ‘thrifty four’, and reject the idea of a collective debt. They believe that the distribution of debt will not contribute to the recovery of the European economy. On the contrary, it will make it possible for the least disciplined and weakest European economies to take advantage of funding from economically stronger Northern European countries.

The four believes that it is not necessary to issue bonds, suggesting to replace them with one-time loans on favourable terms for two years and to limit the areas of activity on which this money can be spent. It is necessary, they claim, to identify the measures that most contribute to economic recovery, such as research and innovation, improving the sustainability of health care and ensuring the transition to a green economy. At the same time, such countries must take firm commitments to carry out large-scale reforms and strictly observe the budgetary conditions, as well as to explain the mechanisms of protection against corruption.

Theoretically, the four has opportunities to oppose the decision of France and Germany, since the consent of all EU countries is necessary for coronabonds. But in reality, as expected, their resistance will not last long, as the option with common debt, in fact, is considered by many to be fair. So, it is mentioned that Germany has long been the recipient of the main benefits of the Eurozone, hence now it's time to share. In the EU, the distinction between north and south has become too obvious lately, and a new split could really be fatal.

 

Commodity chauvinism with surprises

Yet how much financial assistance the weakest and most vulnerable EU economies are going to receive is still a topic of discussions. For example, France claims significant funds. French Minister of Economy, Bruno Le Mer, named the local suppliers of auto parts, who hope for ‘modernization and digitalization’, the Sure Foundation for the partially unemployed, and local startups as the main beneficiaries. The German government also declared that it would provide assistance to its flag carrier Lufthansa (9 billion euros) in return of 20% of the shares of the airline company and two seats on the supervisory board. Therefore, other countries are concerned that Berlin will again gain advantage on the grounds that the German economy is the main drive of the entire EU.

What is ahead of Europe and how will the real recovery be implemented? For example, many European countries actually began to introduce protectionist policies with respect to locally produced agricultural products. The largest retail chains in France transferred their supplies to local farms. Portugal, Greece and Bulgaria have expressed the same intentions. According to Politico, the relaxed competition rules were designed to help national producers, but now they threaten the whole EU economy and local markets with “commodity chauvinism”, violate international and EU trade standards. In this situation, it is most likely that the countries with the strongest economies will benefit.

Therefore, we can expect another surge in anti-systemic populism and surprises during the next national and pan-European elections unless Europe makes a real breakthrough in the democratisation of decision-making process and says no to the practice of closed negotiations - essentially a trivial bargaining, which is far from the declared principles of the still united Europe. Now Europe has a real chance to scale its economy to digital and green tracks, becoming in this sense a leader for the rest of the world.

 

Foreign policy

It will be interesting to observe how the pandemic and crisis will affect the foreign policy of the European Union. Once again, Germany will be on the front line, as the elites of the country so blended in the union cannot imagine themselves outside of it. On the other hand, the EU’s uncertainty in its transatlantic partner, the US, which has become apparent in the recent years, makes all scenarios really unpredictable. Much will become evident in the upcoming presidential election in November 2020.

Remarkably, the EU High Representative for Foreign Affairs, Josep Borrell, said at the annual conference of German diplomats that the leading role in global geopolitics belongs to Asia. According to him, this is the first serious crisis of recent decades without Washington as the leader of global response to the crisis. On the contrary, the US is extensively involved in rivalry with China. In this situation, Borrell believes that the EU should hold to “its own interests and values” and avoid any abuse of cooperation with the EU by other partners.

Borrell added that in the near future, the control of digital networks and the establishment of rules and standards will be the main issues to consider.

Apparently, no one can avoid the transition to global digitalisation these days. At the same time, no one actually knows how the concept of sovereignty will look like under these conditions and how it will be possible to preserve it. Therefore, the EU is actively trying to overcome its systemic and economic crisis. After all, none of the countries of the modern world, let alone Germany or any other European country, will be able to remain the sole centre of gravity.



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