Europe: Fig Leaves to Save Spain and Italy

Looking to score without breaking a sweat, European politicians of almost every ideological persuasion often turn on ‘Brussels’, assigning blame to the union for every conceivable domestic ill and castigating it for their own failings. Unable to put up a meaningful defence to the barrage of accusations and criticism, the EU plods on doggedly, convinced that a Europe of individual – and bickering – nation states stands no chance in a world steered by superpowers.

Doomsayers never tire of predicting the EU’s imminent demise and the ‘colonisation’ of the old continent by China or the United States, both of whom could do without a third wheel. After their first dissonant response to the Corona Pandemic, the 27 remaining member states of the union seem to have belatedly agreed to coordinate their efforts in avoiding a second coming of the virus, rebuilding the economy, and staving off outside bargain hunters.

The EU is, of course, famous for finding compromise solutions at the eleventh hour and kicking the proverbial can down the road in case differences cannot be bridged. In June, the European Commission rediscovered its sense of purpose and unveiled the outlines of an ambitious and costly plan to repair the economic and financial damage caused by extended lockdowns. The initiative is, though necessary, potentially divisive as was shown in May when the so-called Frugal Four, led by Dutch Finance Minister Wopke Hoekstra, staged a revolt of sorts by refusing to consider any form of debt and/or risk pooling. Mr Hoekstra did so rather bluntly, offending southern member states such as Italy, Spain, and Portugal and, in the process, laying bare an unstable fault line.

In the end, German Chancellor Angela Merkel had to intervene in an equally forceful manner. Much to the Frugal Four’s surprise, she came down on the side of the southern have-nots. After Mrs Merkel had properly admonished Dutch Prime Minister Mark Rutte, who was told to stop throwing a ‘childish tantrum’, the chancellor clearly indicated that her country would support the issuance of shared debt by the European Commission, backed by future member state remittances. Mrs Merkel reiterated that Germany will not lack solidarity with Italy, Spain, and other countries whose economies have been derailed by the pandemic.

The repositioning of Germany, previously vehemently opposed to any form of debt and risk sharing, is nothing short of revolutionary in nature. It was, however, inevitable and, as such, expected. Until recently a discrete backer of both the Frugal Four (Austria, Denmark, Sweden, and The Netherlands) and the Hanseatic League 2.0 – another informal grouping of fiscally prudent countries – the German government has repowered the Berlin-Paris axis in the conviction that nothing good will result from an experiment in European brinkmanship.

Perhaps fooled by the country’s rather stern attitude to debt displayed during the Greek banking crisis of 2015, and its almost obsessive dedication to fiscal rectitude, the ‘frugals’ may have overlooked the single-most important consideration of German foreign policy: the constitutionally mandated commitment to further European unity. Berlin considers anything or anyone threatening the integration of Europe as inimical to its interests. This also helps explain why the British were unable to enlist German support during their exit negotiations with the union. The countless appeals made by London all went unanswered with Mrs Merkel repeatedly showing a slight annoyance at the UK’s inability to understand her, diplomatically awkward, position.

Apart from foreign policy considerations, Germany is better aware than most, that its export-oriented economic model needs healthy markets to prosper. In short, not even Germany can afford to let the economies of Spain and Italy founder. The troubles experienced by Greece five years ago are mere pinpricks compared to the potentially devasting consequences – financial, economic, and political – of large Mediterranean markets crushed under the weight of debt and/or austerity.

The European Union has been designed in such a way that, once joined, no member state can leave the collective embrace without inflicting severe damage on its economy and society. By condemning former enemies France and Germany to each other (and to mutual dependency), war was made impossible. Although most Europeans now think of war as an outlandish affliction to which they are immune, the absence of armed conflict is still a relative novelty on a continent scarred by centuries of strife.

Voting for Brexit, the British may have considered the European Union merely as a common market with a few added, and undesirable, embellishments, most continental nations know better and realise its importance, although often remain reluctant to admit their dependence on a project that ultimately seeks to supplant the sovereign nation state.

That nation state was briefly revived after the scope of the pandemic became clear and panic set in. Each EU member state invoked its own sovereign prerogatives in the face of the threat to public health and formulated a bespoke response without consulting or informing Brussels. In fact, the European Commission, the executive branch of the union, was ignored by most, if not all, member states as borders closed and states dipped into their reserves to offer direct support to businesses – both big no-no’s expressly forbidden under European treaties.

It took the European Commission the better part of two months to reassert its authority and convince member states of the need for a coordinated response to the emergency. Paradoxically, the Corona Pandemic may yet strengthen European cooperation and integration. Albeit under a different name, eurobonds will at long last see the light of day which will allow the union to deploy its considerable fiscal heft for the first time by leveraging future income from member states’ remittances to raise additional cash on global capital markets.

The commission also exploring the idea to introduce a limited number of direct EU taxes. In this vein, the French government has suggested a tax on big tech firms whilst others propose additional levies on polluters to help green the continent whilst adding a revenue stream to assist weaker member states.

The plight of Spain and Italy, and the prospect of yet another decade lost to a recession, has been central to Brussels and Berlin. However, the Frugal Four may yet have some life left. Eastern Europe, home to recalcitrant member states such as Hungary and Poland, is not altogether happy that relatively prosperous Mediterranean countries command all attention. The Visegrád Group, which also includes the Czech Republic and Slovakia, has been observed drawing closer to the Frugal Four and their hangers-on (Finland, Slovenia, and the three Baltic republics) to form a mighty bloc of smaller nations that together have to voting power to stop the Berlin-Paris axis from steamrolling the opposition.

Aware of the brewing unrest, German and French diplomats are increasingly concerned over the growing rift that pits the EU’s constituent parts against each other and may either cause lasting damage or result in an ineffectual policy that leaves two of the union largest economies mired in recession.

Arguably, inter-EU diplomacy has never been more complex and challenging than at present. The departure of the UK has emboldened the Dutch to assume the mantle of contrarian troublemaker in Europe. The Netherlands is now the fifth-largest economy of the bloc and The Hague no longer feels the need to follow Germany blindly – most certainly not after that country ditched its commitment to prudent financial management. Listening in The Hague, it would appear that the Germans have gone off the deep end. The disillusionment is palpable, as is the resolve not to follow their example. However, diplomacy is not usually counted as a Dutch strength and The Hague will find it difficult, if not impossible, to keep its fellow ‘frugals’ in line once Germany and France start applying the pressure.

The good news is, of course, that the monetary firepower displayed by the European Central Bank will soon get company from large-scale fiscal interventions to prop up the sagging and broken economies of Spain, Italy, and other struggling member states. Give a little, take a little is how the European Union works. That and an abundant supply of fig leaves for those unable to quite get their way.