On Thursday the 23rd of April, Eurozone Leaders will convene (via teleconference) to discuss the bloc’s economic response to the Covid-19 pandemic.
Already, the bloc’s finance ministers have found agreement on a EUR 100bln employment protection scheme (proposed by the European Commission) and the creation of a EUR 400bln rescue fund, from which distressed countries can borrow money with light conditionality (i.e. few conditions attached, such as limiting government spending by x amount over x number of years).
However, that is about where the agreement ends.
Italy and other South European nations (generally the more heavily indebted) want to increase the size of the bailout fund to over EUR 1trln. Northern European nations, namely Germany and the Netherlands, oppose this.
Moreover, Italy, Spain and France have been pushing hard for the creation of a mutualised EU debt instrument - basically, this would be the EU selling bonds that all of its members are jointly accountable to repay; i.e. if Greece and Italy go bust, the rest of the countries would have to step up to make sure the bonds are still repaid in full.
Here, Northern European nations such as Germany and the Netherlands are particularly. Unlike their Southern European counterparts, the two nations are characterised by a long history of prudent government fiscal policy and hate the idea of propping up irresponsible spending in other nations.
In other words, Germany and the Netherlands are worried about the moral hazard joint EU debt would create; they are scared the EU would go on a spending spree to prop up other, weaker economies, and they will be the ones who end up paying for it.
However, now is not the time to dwell on moral hazard arguments.
Coronavirus is ravaging the European economy and has hit Italy and Spain particularly hard. Without some direct transfers from their already richer and more prosperous Northern neighbours, they may be on the verge of collapse.
That threatens the future of the EU.
As French President Macron has argued, populist anti-EU leaders in the South will argue that Germany and the Netherlands love the EU when it means having an undervalued currency and exporting to the rest of the continent. But they hate it when it means actually coming together in a crisis and making some sacrifices.
Should the European Council refuse to go with coronabonds, this will be a big risk to EUR and general market risk appetite as it would significantly raise the risk of another debt crisis. This could ultimately lead to the collapse of the EU.
The last time there was a debt crisis, it was solved by the ECB. But this time, the ECB has already thrown pretty much everything at the market.
In the eyes of many, the future of the EU now rests in the hands of countries such as Germany and the Netherlands.
Afterall, the union of the EU is like a marriage; together in sickness (like now) and in health - or divorce.
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