ROME — This time, Southern Europe isn’t taking nein for an answer.
As coronavirus cuts a swath of economic destruction across Europe, pushing the already-strained budgets of southern countries to the brink, calls are getting louder for the eurozone to intervene by issuing debt backed by all members.
The EU “must act before it’s too late,” Italian President Sergio Mattarella, a man not known for drifting into pathos, warned in a televised address to the nation on Friday.
The logic behind the so-called corona bonds is simple: If high-debt countries such as Greece, Spain and Italy could borrow money with Germany’s backing as a guarantor, investors would consider them less of a credit risk and demand lower interest rates, making it easier for those countries to continue to tap the bond market.
“We aren’t asking for a mutualization of debt, but the mutualization of the excessive risk of recession,” Italy’s EU Minister Enzo Amendola told a group of journalists. “I cannot help but flag the risks of a lack of unity.”
For Germany and its northern allies, the idea is a nonstarter. Even as they’ve put in place massive rescue packages for their own populations, they’ve shown little willingness to help their southern neighbors. Though Italy insists it can pay back whatever it borrows and is only asking its eurozone partners to effectively co-sign its loans, not to foot the bill, many economists doubt it would be able to do so.
Germans fear they would be left holding the bag. While pooling debt might make economic sense for the eurozone as a whole, in Germany — where former Chancellor Helmut Kohl only managed to sell the common currency in the 1990s by promising Germans they wouldn’t end up paying other countries’ debts (“The community carries no liability for the obligations of its members”) — violating the euro’s founding principle would count as a historic betrayal.
During the eurozone debt crisis that began in 2010, it was concern that Chancellor Angela Merkel was backtracking on Kohl’s promises that fueled the rise of the populist Alternative for Germany (AfD), now the country’s largest opposition force. Then, as now, countries on Europe’s periphery quickly demanded “solidarity” from their northern neighbors in the form of common debt issuance — and Germany and its allies quickly responded with a firm “no.”
During the euro crisis, it was fairly easy for Berlin to dismiss the calls for eurobonds by pointing out that the likes of Greece and Spain had only themselves to blame for the troubles they faced. Merkel took little offense at being cast as the crotchety schoolmarm chiding Southern Europeans for not “doing their homework.”
This time is different. No one in Europe did their homework; the risks posed by the pandemic were underestimated by all. As a result, people are dying in large numbers and economic activity has ground to a halt.
While there’s no way to gauge the emotional toll the crisis is taking on hard-hit countries like Italy and Spain, there’s no doubt that it is substantial. Just as the trauma of the pandemic will be etched into Southern Europe’s collective conscious for generations to come, so too will the reaction of their northern cousins.
“Do you not understand the emergency we are going through?” an exasperated Spanish Prime Minister Pedro Sánchez asked Merkel during last week’s EU summit.
The German leader insisted she did. Even so, corona bonds remained off the table.
Just as during the euro crisis, Germany’s idea of solidarity during the epidemic more resembles tough love than a warm embrace.
Instead of common debt issuance, Berlin is pushing for bailout loans with strict conditionality. Its preference would be for countries that need help to apply for loans from the European Stability Mechanism, the currency bloc’s €500 billion bailout fund.
But the conditions on that aid are onerous. Countries are placed under the supervision of the so-called Troika — the European Central Bank, the European Commission and the International Monetary Fund — and forced to implement difficult economic reforms.
Italian leaders argue that the pandemic was beyond their control and that Rome shouldn’t be compelled to accept such strictures. Italian Prime Minister Giuseppe Conte, speaking on German public television on Tuesday, cautioned Germans not to overlook the historic dimension of what is unfolding across the Continent.
“We are not writing the page of an economic manual, we are writing the page of a history book,” Conte said. “Europe needs to demonstrate whether it is the common house for European citizens, whether — faced with epochal challenge — it succeeds in offering an adequate response that lives up to the tasks it was created for by [EU founding fathers] Schuman, Adenauer, De Gasperi.”
The prime-time interview followed an open letter from a group of Italian mayors and senior politicians that was published in Tuesday’s edition of the Frankfurter Allgemeine Zeitung, the daily bulletin of Germany’s conservative establishment, demanding that Germany accept debt mutualization.
The signatories recalled that Italy, Spain and other countries forgave much of the debt that Germany owed after World War II. “Dear German friends, remembrance helps one make the right decisions,” they wrote.
For now, the Germans, backed by the Dutch, Austrian and Finns, are holding firm.
In the south, the northern alliance has brought lingering resentment over the way Mediterranean countries were treated during the euro crisis back to the surface.
A suggestion by Dutch Finance Minister Wopke Hoekstra last week that the European Commission prepare a report on why some countries lacked the fiscal space to weather the current crisis triggered a firestorm.
“This recurrent pettiness completely undermines what the spirit of the European Union is,” Portuguese Prime Minister António Costa said, calling the suggestion “repugnant.”
To many southern ears, the Dutchman’s comment recalled a remark in 2017 by the country’s then-Finance Minister Jeroen Dijsselbloem that the region couldn’t “spend all the money on drinks and women and then ask for help.”
So far, German officials have avoided such missteps, and many are uncomfortable with the perception that they are working in concert with the Dutch.
If Southern Europe is going to win Berlin’s support for more generous assistance, it will need to convince Germans that their own prosperity is at stake.
While German public opinion and Merkel’s Christian Democrats are solidly opposed to pooling debt, the Social Democrats, the chancellor’s junior coalition partner, are open to the idea, as are the Greens.
If nothing else, that support could trigger a genuine debate in Germany. Over the years, the country’s discussion about how and whether to support other eurozone countries has taken place in cartoonish terms: In the popular imagination, Germany is the disciplined, hard-working northerner and everyone needing help is the polar opposite.
That Germany has been the greatest beneficiary of both the euro and European integration is something many in the country don’t understand, largely because their politicians aren’t making that case.
The fact that many Germans feel a deep connection to Italy may also help. In contrast to its relationship with most of its neighbors, Germany’s ties to Italy are not as burdened by a deep sense of historic guilt. During Germany’s postwar boom, hundreds of thousands of Italians came as “guest workers,” and many stayed. The number of German visitors to Italy every year (12 million) is double that of any other country.
In short, the cultural and personal ties between the two countries are substantial. If there’s one country Germany are going to help out of a crisis, it’s Italy.
And yet, stereotypes about Italy’s free spending ways persist in Germany, even though Rome’s fiscal challenges are rooted in Italy’s tepid economic growth and not a lack of budgetary discipline.
Whether Southern Europe ends up securing corona bonds (which remains unlikely given Northern Europe’s stiff resistance) or some other form of assistance, it won’t come cheap.
The shutdown will cost Italy billions of euros per month. So far, the government has sought to borrow an extra €25 billion and announced it wants to borrow €25 billion more. With Italy’s total debt already at €2.5 trillion, or about 130 percent of its GDP, it doesn’t have much room to maneuver. (By comparison, Germany’s debt to GDP ratio, a key marker of a country’s creditworthiness, is just above 60 percent.)
“It’s safe to say Italy’s debt-to-GDP ratio will rise to around 180 percent by the end of this year,” said Alberto Bisin, a professor of economics at New York University.
Italy, he added, will struggle to pay that back. “It’s either you raise taxes, which is unfeasible in Italy since they are already extremely high, or you repay it through sustained economic growth which needs structural reforms to happen and these haven’t been passed in 30 years.”
“So either northern countries decide they will face the costs to avoid Italy crashing out of the eurozone, or I don’t see many alternatives,” he added. “We’re pigeonholed.”
Spain, Portugal and Greece are almost certain to face similar challenges.
This week, Commission President Ursula von der Leyen, after angering Italian leaders by dismissing corona bonds out of hand, suggested the EU budget could be used to offer support. But given the amount of aid countries need, the question is whether it would be enough.
Instead of focusing on the details of how to extend aid, leaders across Southern Europe have implored their northern partners to recognize that what’s at stake is the future of the EU itself.
“Either the EU does what it has to do or it will end,” Portugal’s Costa said.