Leiden International Studies Blog

Crisis begets crisis? Assessing the crisis response in the EU

Crisis begets crisis? Assessing the crisis response in the EU

Crisis begets opportunity, they say. But looking at how the EU member states have responded to the economic fallouts of the Covid-19 pandemic, one might wonder whether the crisis response will beget another crisis.

As I argue below, the proposed measures put financial solidity before political solidarity and given the entrenched positions between northern and southern EU states, the solutions adopted during the crisis will do little to solve it. Instead, they might merely set the stage for the next crisis, which bears the danger of undermining popular support for the EU project altogether.


How has the EU and its member states responded to the Covid-19 pandemic?
Since the beginning of the outbreak, the EU has given support to member states by facilitating the exchange of information among relevant national authorities. Member states have rushed to help each other with medical supplies and patients have been transferred from The Netherlands, France and Italy to Germany, given that the latter had still some capacities in its Intensive Care Units. The EU Commission has established a fund, "Support to mitigate Unemployment Risks in an Emergency" (SURE), a financial instrument to complement the national fiscal stabilizers, funding short-time working schemes of up to 100bn Euros (an overview of all planned fiscal and monetary policy measures can be found here and here).

One might look at all of this and conclude that these are indeed signs of solidarity and that member states and the EU – after having learned their lesson from the previous Eurozone crisis – are rising to the occasion. The Commission President von der Leyen, for one, keeps repeating that all of this is a "further tangible expression of Union solidarity".

But is this solidarity? Do these actions reflect shared values and are they conducive of creating a feeling of unity and social cohesion across the peoples of Europe? I have my doubts. Here is why:
The first thing to note is labelling: A lot of financial instruments that are labelled as funds (such as the SURE fund) are, in effect, loans. And loans have to be paid back at some point. If one considers that member states who are hardest hit by the pandemic (such as Italy) are also those member states who struggle with public finances due a huge debt burden, you might wonder whether more loans (debt) are actually a viable solution. It would be absurd to scold member states for running budget deficits and accruing massive debts, only to burden them some months later with more debts. To be sure, loans are better than no support at all – and at this point the interest rates on these loans would probably be lower than the interest rates that some governments would have to take from the markets. However, as a group of leading researchers on the question of unemployment re-insurance schemes in the EU have pointed out, “without a broader EU initiative, these loans will do little to avoid a debt crisis in affected countries” – in fact, they might just add to it.

…or financial solidity?

So, are there broader initiatives on the horizon? The contentious debate between member states on whether to issue common bonds (Eurobonds) or to use the European Stability Mechanism (ESM) shows that we are far away from a serious joint solution. Without going into the details of the debate, the difference between Eurobonds and ESM boil down to conditionality: issuing Eurobonds would allow Eurozone governments that face high borrowing costs on financial markets to borrow on more favorable terms, given that all member states would mutually guarantee that bondholders (lenders) would eventually see their money back. The ESM, on the other hand, is a credit facility that grants loans to member states, but attaches conditions to these loans (if you think right now that this sounds a lot like the IMF you are not wrong). While several member states favored the Eurobond option, the Eurogroup eventually settled on using ESM loans as a way to help member states to finance healthcare costs, without attaching conditions. But even if the ESM loans come without strings attached, the compromise is far from optimal: for one, commentators worry that the ESM volume is not large enough to stem this crisis, and then still have enough reserves to also stem an impending currency crisis at a later point in time.
On a political level, things look even grimmer: the Italian government coalition partners threaten with rejecting the ESM compromise, insisting on the introduction of Eurobonds. The worry among parts of the Italian political establishment is that loans will ultimately lead to more austerity (and they might have a point as conditionality might be re-introduced later on).

However, the issue is not just one of financial burden sharing to deal with the fallouts of the pandemic. At the heart of the debate among member states are questions about the rules governing the monetary union – rules that place balanced budgets and macroeconomic stability above all else.
Remember the reports about Covid-19 patients being transferred from Italy, France and The Netherlands to Germany at the beginning of this blog post? Germany was able to take on patients from other countries because it has more hospitals (and hospital beds), and more than double the amount of Intensive Care Units than any of its neighboring countries. Obviously, its healthcare infrastructure didn’t grow over night, but has required some serious investment through the public purse over many years. And yet, looking at the 2019 country report for Germany of the so-called European Semester (an EU instrument to monitor member states’ budget balance), one reads that there is apparently an “oversupply of hospital beds” in Germany and that there is “room for efficiency gains”. The recommendation is clear: cut the number of hospital beds! To be sure, such views are not exclusively those of the EU Commission, but are broadly shared by both German politicians left and right, as well as lobby groups. Just imagine they would have responded to that advice. Where would we be today?

Underestimating public support

For now, the overall picture seems to be this: concerns over financial solidity seem to prevail over political solidarity. The EU Commission chose to focus on loans and several governments (such as the Dutch, Austrian or German governments) continue to insist on EU Treaty rules that forbid the mutualization of public debt in the Eurozone, while emphasizing “sound public finances” – the same austerity playbook that has been tried (and failed) during the last Eurozone crisis. One might interject that the obstinacy of Dutch, Austrian and German governments is just a reflection of what their voters want. But is public opinion in the North of Europe so uncompromising on the question of sharing sovereign debt? The results of a recent survey experiment casts doubt on this commonly accepted narrative: asked for their support for Eurobonds, respondents (in Germany) were initially reluctant. But once information about both costs of Eurobonds and costs of an exit of Italy from the Eurozone were presented, more than half of the respondents preferred Eurobonds over Italy leaving the Eurozone. Politicians in the North of Europe might thus be underestimating the public support for common debt instruments in the Eurozone. And looking at recent opinion polls from Italy, support for the European Union is eroding rapidly – so we might be very close to get a chance to see a real-life replication of the survey experiment results.

Europe will be built through crises

So what does all of this mean for the future of the Eurozone, and the European Union as a whole? A somewhat optimistic interpretation of what is going on right now and how we will move forward may sound something like this: The Eurozone is an incomplete construct, but it is developing with small, incremental steps. If the past is any indicator of future developments, the EU is integrating further precisely during such moments of crises: a crisis reveals the shortcomings in the EU’s institutional architecture, and once the dust has settled member states will fix these short-comings, usually by transferring more powers to the EU, or establish new rules and mechanisms.
Unfortunately, such optimistic visions leave out a number of crucial points. First, the incompleteness of the Eurozone (the absence of a common fiscal policy, common debt instruments, no lender of last resort) has been a catalyst for deepening the previous Eurozone crisis. Second, while member state governments realize all these shortcomings, the problem is that they cannot agree on common, bold, transformative solutions for the reasons I listed above. Instead, during long and sometimes inconclusive marathon-negotiations in Brussels national governments usually reach agreement based on the “lowest common denominator”. This way the EU’s institutional architecture remains incomplete which, third, sets the scene for the next crisis. Erik Jones and his co-authors have dubbed this pattern of European integration “Failing Forward”. The biggest risk in this pattern of EU integration is that over time it might erode citizens’ support for the EU project altogether: because what the public at large sees and understands is not the compromises reached in the European Council or Eurogroup meetings, but that the EU is continuously in crisis. Who would support a political system (or project) that is continuously in crisis? One might say that issues relating to the monetary union are particularly sensitive and that in other areas the EU progresses without constant crisis. But if you look at the EU’s asylum policy the picture looks pretty much the same: a lack of solidarity among member states’ governments, an incomplete institutional structure that continues to amplify the humanitarian crises at the external borders of the EU (the infamous Dublin system) and an erosion of public support for the way the EU handles the crisis.

Jean Monnet, one of the founding fathers of the European integration project remarked in his memoirs that “Europe would be built through crisis, and […] it would be the sum of their solutions [to those crises]” adding in the next sentence that these solutions would first need to be proposed and then also applied. As I argued above, the proposed solutions might not be enough to stem the impending crisis. Worse: if what is proposed now (loans) will be implemented, it might even amplify the crisis. As my colleague Bram Ieven remarked to me some weeks ago, it seems that this famous adage from Monnet might have run its course. I think he is right: what we have been witnessing over the last decade might be a slow transition from “Europe being built in crisis” to a mode of European (dis)integration where “crisis begets crisis”.