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Europe: Heading for a Fight

By Jamie Dettmer June 08, 2020

Eurocrats admit they are breathing a sigh of relief that Britain is out of the European Union. If it had still been a member, they would face an even trickier prospect of persuading the fractious bloc to agree a politically ambitious pandemic economic recovery plan to lift flagging economic fortunes.

Even without Britain, a proposal that would see $850 billion of grants and loans being splashed around is facing strong resistance from some north and central European states.

The EU is heading for yet another fight, one that may well set the bloc on the path of closer political and fiscal union but risks stirring up a renewed populist backlash as disruptive as the one spawned by the 2015 migration crisis.

Jacques Delors, a former European Commission president, has warned that lack of EU solidarity poses "a mortal danger to the European Union."

The European Union has weathered crisis before – from the eurozone bailouts after the 2008 global financial crash to the unruly migration crisis and an ill-tempered Brexit, but some fear the coronavirus could be even more destructive as it sets neighbor against neighbor.

Italy, a flashpoint

It is not often that the likes of Nigel Farage, Britain's arch-Brexiter, and the pro-EU philanthropist George Soros, agree, but last month they did with both arguing that the pandemic and its political and economic impact risks breaking up the bloc with public opinion towards the EU turning increasingly sour in southern European countries.

In an interview with the Dutch newspaper De Telegraaf, Soros said: "I am particularly concerned about Italy. What would be left of Europe without Italy? Italy used to be the most pro-European country."

Farage said on his London show radio show, "I am truly astonished for the first time in my life to find that I am in total agreement with George Soros." Farage has long argued that Italy is the most likely country to follow Britain out of the EU. Many Italians feel they were abandoned by their European partners, who declined requests for medical equipment and economic aid when the pandemic unfolded in February and March, overwhelming hospitals in the north of Italy.

Italians are also affronted about their country being singled out as its neighbors start lifting travel restrictions and open up their borders for tourists and travelers. Many EU countries are requiring anyone returning from an Italian holiday to quarantine for 14 days, even though Italy is now recording low number of new coronavirus cases.

That has infuriated Italian ministers. Last week, Italy's interior minister Luigi Di Maio warned in a Facebook post: "If anyone thinks they can treat us like a leper colony, then they should know that we will not stand for it." He added: "We do not accept blacklists."

Polls are reflecting a dramatic shift in public opinion in Italy towards the EU. According to one survey by the pollster Tecné, 42% of Italians want to leave the EU, up from 26% in November 2018. Eurocrats are drawing some comfort from the fact that a quarter of those ready to leave now would be prepared to remain in the bloc, if Europe approved economic measures that help Italy.

Saving wrecked economies

Eurocrats hope to do so. On June 19, the heads of the bloc's national governments will meet in Brussels to thrash out a joint response to the economic havoc the pandemic has left in its wake. The European Commission has warned the EU economy would likely shrink by 7.5% this year – much worse than the 2009 contraction of around 4.5%. "The EU economy will experience a recession of historic proportions," the commission cautioned after weeks of economic shutdowns because of the coronavirus.

Last month, France and Germany gave added impetus to a plan that would see the bloc take a step towards mutualizing debt. Under the proposal, grants and loans being envisaged to help member states weather a recession would come from money borrowed from capital markets funded by future EU taxes.

Two thirds of the money would be distributed as grants that do not have to be paid back by the individual states that receive them. The other third would be offered as loans. The proposal has been greeted by some as Europe's Hamiltonian moment and is being compared to the 1790 deal between U.S. founding fathers Alexander Hamilton and Thomas Jefferson, who agreed that the newly formed U.S. federal government would assume the outstanding debts of the individual states, creating a single fiscal union.

The money being proposed is "small change in an era when politicians and central bankers conjure up trillions almost daily," says Anatole Kaletsky, chief economist at Gavekal Dragonomics, a financial services company, and a former columnist at the Financial Times. "If adopted, the proposal might be remembered as the moment when Europe became a genuine political federation," he said.

Writing for Project Syndicate, a site that publishes commentary, Kaletsky said the plan would see the EU "issue bonds in its own name and guaranteed by its own revenues, instead of using funds raised by national governments, whether acting together or separately." It would also mean the bloc's taking a major step towards a fiscal federation because to "guarantee and service hundreds of billions of euros of new borrowing on its own account, the EU will require more tax revenue than it now receives."

It would have to levy new taxes of its own, in addition to the customs duties and a small share of national sales taxes it already receives.

Not in this together

But there is strong resistance to the plan from a group of four northern states – Austria, Denmark, the Netherlands, and Sweden – which are opposed to the scheme and are unhappy with the idea of grants, wanting any financial aid paid back and only offered contingent on borrowing nations' promising economic reform.

Some central European countries, notably Hungary and Poland, are also dissatisfied, fearing that they will be short-changed and that Italy, France and Spain, the three European countries hardest hit by the virus, will receive the lion's share of the grant money. They note all three have bigger economies than they do.

Far from bringing Europe together in solidarity, the pandemic and its economic impact risk deepening fissures in a bloc already split over foreign, defense and migration policies. Economic inequality between member states is likely to increase.

The clash over the economic recovery plan is coinciding with mounting fears that the 27-member bloc's single market fraying with richer members doling out huge amounts of state aid and subsidies to support their pandemic-struck businesses, giving them a competitive edge over rivals in poorer countries, struggling neighbors, mainly in the south, who cannot match the subsidies.

That will aggravate the endemic imbalance within the eurozone between creditor countries in the north and debtor countries in the south, which the economic recovery plan will not correct. An uneven recovery across the bloc risks fueling populist anger and anti-EU sentiment.

Ill-natured squabbling has prompted warnings from Italian Prime Minister Giuseppe Conte that the EU project itself could be placed in jeopardy unless the rich northern states are more generous in helping those in the south. Dutch claims that the ailing south has only itself to blame for its economic woes prompted outrage recently from Portugal's prime minister, António Costa, who called the charge "disgusting."

While the recovery package, if approved, may help to take the sting out of anti-EU populism in Italy, it could trigger a backlash northern states, like the Netherlands and Germany, say analysts. The say the pandemic hit as Europe was already worried about long-term trends.

The continent's population is graying with birth rates declining. The slow pace of technological innovation, compared to Asia, had already slowed economic growth before the virus appeared.

National rivalries are coming to the fore. Governments now are worried that much like after the 2008 financial crash, their businesses will become the target of hostile foreign takeovers. After 2008, Greek ports were bought by China and Gulf states grabbed a string of European banks.

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