Observers of the EU’s evolution in the capital of Brussels have witnessed an experience of the promised arrival of the long-awaited resolution of the group’s dysfunction and economic malaise that never happens.

The pattern is virtually always the same: the countries meet, they squabble, and then they emerge with a “landmark” or “historic” compromise that deals the lowest common denominator in terms of economic impact.

The EU Joint Declaration characterized the newly created €750 billion recovery fund as an “ambitious and comprehensive package combining the classical [budget] with an extraordinary recovery effort destined to tackle the effects of an unprecedented crisis in the best interest of the EU.

That is typical Brussels-driven hyperbole. There are some important new policy developments that give a small glimmer of hope to those hoping to nudge the EU toward full-on debt mutualization.

That is to say, to jointly issue a common debt instrument of a pan-European institution (as opposed to national sovereign bonds) to fight the outbreak and its effects. The pooling of liabilities of the European Union nations and linking them to the EU’s currency issuer.

The European Central Bank, are an important series of precedents, and there’s also the positive benefit of providing more fiscal support to the severely indebted countries of southern Europe (although, as usual, not enough).

On the other hand, that is precisely why the wealthier northern countries resist it: they fear that such mutualization would derogate from their own pristine credit ratings, while simultaneously allowing the so-called profligate “Club Med” countries to free-ride and avoid making reforms to their own systems.

Caught in the middle of this conflict is France, a nation that, along with Germany, is the fulcrum on which the entire European project turns. It is a country with a history of global aspiration, but its economy contains many of the weaknesses of the southern periphery countries.

The government of Emmanuel Macron was one of the leading actors behind the latest initiative. But at the end of a marathon negotiating session, there was virtually nothing on the table for France itself in terms of direct aid or broad concessions toward enhanced debt mutualization.

This is highly problematic, as France too has extremely high debt levels and is one of the biggest economic casualties of COVID-19.

France’s current political strategy is reminiscent of its thinking during the negotiations that led to the common currency.

At that time, French President François Mitterrand calculated that the creation of the euro would provide the means whereby France could mitigate the economic power of Germany. That proved to be a fatal miscalculation.

In theory, debt mutualisation is the glue that could bind together a bunch of federated states, as Alexander Hamilton did for the United States.

But in practice, such proposals in the past have been the source of ongoing tension and dysfunction, especially within the Euro-zone.

The attempts to bridge the gap have provoked yet more division and possible future splits among the various EU member states, exacerbated by the backdrop of a catastrophic pandemic, which means that incrementalism won’t deliver the goods.

The Covid-19 relief funds will be borrowed directly by the European Commission (EC), who (per the Financial Times) will “establish a yield curve of debt issuance, with all liabilities to be repaid by the end of 2058.

As the bonds remain a liability of the EC, they consequently won’t be added to the national balance sheets of the distressed countries that will be the main recipients.

These borrowings from the capital markets will be supplemented by existing national contributions to the overall EU budget.

The latter provision created another stress point that was relieved by the usual expedient of providing additional budget rebates—basically cashback on their annual EU contributions.

The discount for the so-called “frugal five” (Finland, Austria, the Netherlands, Denmark and Sweden) was made in order to enable those countries’ leaders to sell the package to the respective national parliaments (where it still must be ratified). Effectively, the wealthiest countries are being bribed with offsets to secure an agreement.

So tension remains, even as debt mutualization looks marginally more possible today than it was before the agreement was secured.

It’s messy and potentially explosive, as all such European compromises tend to be, but such messy ambiguity almost certainly means we will witness similar conflicts in the future.

The problem is that time is running out as the continent faces economic problems of a magnitude not experienced since the end of World War II.

While the exigency of the pandemic is slowly pushing the EU member states toward going further than they have gone before, the very unpredictability created by the Corona-virus makes it difficult to determine what kinds of spending will provide optimal outcomes.

There will likely be a good amount of failure that will provide a bounty of evidence for the frugal five austerians, who remain profoundly suspicious of anything that remotely approximates activist fiscal policy. Likewise for the Euro-sceptics if the marginal amounts allocated under this program fail to alleviate economic stress.

Extraordinary circumstances demand extraordinary measures and, short of war, it is hard to envisage a more damaging backdrop than a p(l)andemic, which has single-highhandedly forced the shutdown of the global economy and continues to act as a brake on recovery, as each new outbreak creates the possibility of renewed shutdowns.

That kind of an environment not only makes consumers more hesitant to spend money (given renewed uncertainty about collective employment, to say nothing of the risk of jobs being lost forever—and perhaps with good reason, considering the likely fall-off in air travel, restaurants, and other forms of leisure activities).

Likewise, businesses are increasingly reluctant to invest in that kind of an environment.

France, as much as Italy, could ultimately prove the weak link that would potentially blow up the European Monetary Union, given the structural divergences in their respective economies vis-à-vis Germany.

Had economics alone determined the creation of a new supranational currency, a more viable currency zone would likely have been restricted to a quasi-Deutsche Mark bloc comprising Germany, the Benelux countries, and a few of the Nordic nations.

These countries shared a high degree of pre-existing economic/social/cultural convergence even before the creation of the euro.

The violent protests in 2018 of the “yellow vests” (which mirrordecades of earlier incidents of civil unrest) and the corresponding rise of populist parties in France point to the unlikelihood that the French government could sustain the kind of economic punishment that has been inflicted on countries like Italy, Greece and Spain.

The Paris-Berlin axis has long been the motor behind the entire European project. Much as France’s Henry IV once (apocryphally) declared that Paris is worth a mass,” when the Huguenot king converted to Catholicism in order to ensure maximum political legitimacy for his rule.

Germany and the frugal five, therefore, have to determine whether or not debt mutualization (or some other form of European integration) is a price worth paying in order to prevent total fragmentation.

New Europe / ABC Flash Point News 2020.

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Methusalem
Methusalem
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02-08-20 21:13

The US dollar will blink first?