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Homeland Security

Coronavirus Pandemic Risks Widening EU Splits

By Jamie Dettmer May 18, 2020

At the start of their coronavirus lockdowns, European governments scrambled to shore up businesses and the public sector with subsidies – a bid to ensure that a post-virus recession is not prolonged because of cascading layoffs and bankruptcies.

But the economic prospects look dim for Europe with the impact of the lockdowns, now being slowly relaxed, lasting years, analysts say. Governments, saddled with annual deficits at war time levels, face dismal choices between cutting public spending or increasing taxes – either of which would slow down recovery.

This week, European countries further eased coronavirus restrictions and opened more businesses, including bars and hair salons, after two months of economically crippling shutdowns.

At the tomb and basilica of St. Francis in Assisi, Italy, Father Enzo Fortunato said, "Having the churches open again in this period is a sign of hope."

He spoke as mask-wearing worshippers observed strict social distancing rules and had their temperatures taken at the entrance. But relief at the easing was mixed with sorrow for the dead and anxiety about the economic consequences on a country that has never fully recovered from the 2008 financial crash.

While Italians relished some freedom from onerous lockdown rules, officials in Rome – much like their counterparts in other European capitals – were monitoring the economy, which they expect to shrink by 10%.

Confcommercio, Italy's retail association, reported Monday that consumer spending collapsed by 47% in April and that the risk of permanent damage to the economy is great. Carlo Sangalli, the association's president, called for "an overall plan for the reconstruction of the country, a plan that still does not exist."

Struggling for unity

Planning by individual European governments is difficult. With their interlocking economies and lacework of rules and regulations, European Union member states are struggling to find unity and agree on the details of how to fund a pandemic pan-EU recovery. They are also looking at how far the European Central Bank should go to support the endeavor by buying up government debt, worsening preexisting divisions among the richer northern states and poorer southern ones.

Far from bringing Europe together in solidarity, the pandemic and its economic impact risk expanding and deepening fissures in a bloc already split over foreign defense and migration policies. Economic inequality is likely to increase, with wealthier states better able to bail out their national industrial champions and businesses, giving them a competitive edge over rivals in poorer states.

Demand for richer states to bail out poorer ones is being ignored, enraging national leaders in the southern part of the continent who have warned that the bonds of membership will be strained more than was seen in the wake of the financial crash.

Ill-natured squabbling has prompted warnings from Italian Prime Minister Giuseppe Conte that the EU project itself could be placed in jeopardy unless the northern states help those in the south.

Dutch claims that the ailing south has only itself to blame prompted outrage last month from Portugal's prime minister, António Costa, who called the charge "disgusting."

Recent poll numbers suggest that Italians – already affronted by the lack of prompt medical equipment assistance from neighbors as they became the first to bear the brunt of the coronavirus – are resentful.

Earlier this month, a survey found that 44% of Italians were ready to follow Britain out of the EU – a sharp jump from previous polls and far above the 9% who were against EU membership back in 2000 as Italy switched its currency from the lira to the euro. According to pollster Gianluca Borrelli, "Italians feel betrayed."

Rich, poor suffering

The wealthier countries are also struggling, and northern bailouts and wealth transfers risk resentment in Germany, which is now officially in a recession. In the first quarter of the year, output fell at its fastest pace since the 2008 crash.

German economists expect the country's economy, the largest in Europe, to contract by between 10% and 20% in the second quarter of the year.

"Things will get worse before they get better," warned Carsten Brzeski, an economist at ING, a Dutch banking group.

The eurozone economy as a whole shrank in the first three months of the year at the fastest rate on record, with France's contracting by 5.8% in the first quarter. The Italian economy diminished by 4.7%. Spain contracted by 5.2%.

GDP in the single currency bloc contracted by 3.8% in all, its steepest fall since the euro was created in 1999.

Second-quarter figures are expected to be worse when the full impact of the economic shutdowns are fully revealed. The consensus prediction is that the eurozone's GDP will drop by nearly 8% this year – nearly double what it suffered in 2009. Hopes of a speedy "V-shaped" recovery are vanishing fast, with economists warning that weak demand will plague Europe for some time to come.

German impact

Germany's highest court has not helped in the bid to sort out a pan-EU economic stimulus package. Last week, it ruled EU law does not have limitless primacy over national laws, a decision stemming from the European Central Bank's purchase of government bonds during the sovereign debt crisis prompted by the 2008 financial crisis.

Germany's constitutional court ruled that the ECB had breached the principle of proportionality, with bond purchases after 2008 topping $2.6 trillion. The court said that without legal authority, the bank had trespassed into trying to make broad economic policy for the eurozone and overstepped its legitimate competence.

The court found that Germany's Bundesbank should not have signed off on the ECB's actions and rejected a legal ruling by the European Court of Justice that it had to do so.

The German ruling is explosive on two grounds, legal experts say. First, while the ruling did not cover the latest $914 billion purchases of mainly Italian and Spanish debt with so-called "pandemic bonds" in March, it could effectively jeopardize the ECB with any further massive asset and debt purchases.

The bonds, which are underwritten by the wealthier states, relieve pressure on Italy and Spain by keeping down the interest costs of borrowing for both countries when they go to the open commercial market to do so.

The decision has abruptly thrown into doubt the rule of EU law, risking a further fraying of the European project and placing in jeopardy "the unity of the EU legal order," warned the European Court of Justice.

According to Arnaud Mares, a former adviser at the ECB and now at Citigroup, "the ruling represents a genuine threat to the stability of Europe." He added that it "could potentially bring the European Union to a breaking point much faster than most people think possible."

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