The pandemic is a litmus test for the ever-challenged European Union project. While the EU's monetary integration has proceeded reasonably well, including the ECB's bond buying operations, the same cannot be said about fiscal policy integration. This has struggled on the face of opposition among the richer countries about the moral hazard associated with mutualising such measures, especially given the profligate southern economies.
But in recent days, there has been a renewed push for fiscal policy action by the EC, and Adam Tooze argues strongly in favour of it,
Nine heads of government, led by France, Italy, Spain and Portugal, have proposed mutualised “coronabonds”. This is a proposal that has been made repeatedly since 2010. It has long had the support of the ECB, which wants a sensible balance between fiscal and monetary policy. A common bond would be the foundation of a fiscal apparatus to match the scale of the currency union. Faced with a common crisis such as Covid-19, it is more warranted than ever. But the opposition of the northern states is adamant. As they have shown in recent weeks, they are determined to resist the idea even if it causes an open breach with their European partners. It is possible that some complex compromise can be worked out that will allow the common rescue fund, the ESM, to serve as the basis for borrowing. It is also possible that the European Commission may gain acceptance for its proposal of a joint fund to support unemployment and short-time payments across the continent. But the moment for an impressive display of common resolve has passed. Faced with the urgency of the crisis, the eurozone can offer nothing like an adequate programme of common public spending.
But Gideon Rachman makes an even more compelling case against it,
The mutualisation of debt within the EU has always been the reddest of red lines for the Germans, the Dutch, the Austrians, the Finns and others. If it is pushed through now — in an atmosphere of crisis — it could set a time-bomb under the EU. The danger that southern Europeans will feel abandoned by the north has to be set against the risk that northern Europeans will, at some later date, feel exploited by the south. The Italians and the Spanish rightly resent being caricatured as lazy, spendthrift southerners. But the opposite caricature of the rich, egotistical, arrogant northerners is also unfair — particularly when it is larded with references to Nazism and accusations of immorality. Voters in the Netherlands and Germany also feel squeezed by long years of austerity. And both countries have also been badly hit by coronavirus. Hospitals in the Netherlands are on the brink of running out of critical care beds. The longer-term fears of the northern Europeans are also legitimate. As one Dutch friend put it to me with pardonable exaggeration: “We know that the savings are in the north and the debts are in the south.” The northerners are alert to any sign that they are being sucked into permanent, large transfers of cash to heavily indebted EU partners. They are justifiably concerned that the current anguish is being used to push forward ideas that they have already rejected, many times over.
In the days ahead, if EC goes ahead with approve something on these lines, it will be regarded as the crossing of a Rubicon in the European project. It would, effectively, set the stage for a fiscal union. However, if it is not forthcoming, it could equally well exacerbate the feelings of mistrust and strengthen eurosceptics and right-wing nationalists. I would not go so far as to say that it will lead to break-up of the EU.
Dilemmas like these present interesting choices. The supporters of Eurobonds appeal to the morality of pure reason and logic, and some diffuse universal notion of fairness - the southerners are so badly impacted, the northerners are the only ones who could help them, and it is unfair to let your European brethren suffer. This is the classic liberal position. The opponents channel the morality of intense and entrenched collective opposition of the people of democratic nation states. This is what ordinary people think in the real world - a morality about notions of right and just that go beyond reason and are grounded on emotions and long-held views, as Jonathan Haidt has written.
I am sympathetic to Gideon Rachman's argument since such decisions are intensely political choices. No government can over-ride the collective will of a nation, in deference to certain liberal values, and not run the serious risk of a political backlash that will wash them away.
There are high-profile examples from recent times of how such choices can backfire. The outcomes can be far worse than the status quo ante. The Brexit vote and more recently, the decision to dilute it led to the sweeping election victory of an even stronger anti-Europe government. In the US, the liberal establishment's support for a discredited Presidential candidate and subsequent refusal to acknowledge the democratic choice of an electoral majority will almost certainly lead to something even worse than now. The only reason Germany got away with limited damage from the decision to allow over a million immigrants is perhaps Angela Merkel.
It is necessary to take a longue duree view of deeply political endeavours like the European project. It will have its ebbs and flows. It will come close to collapse several times. But a forced technocratic decision over-ruling the political will of citizens on something as critical as this is likely to be more damaging in the long run.