The EU needs to look beyond Europe for a Recovery

Once the current coronavirus crisis is over, there’s no doubt that we will all emerge into a vastly different world. Much has already been said about what will likely change on a geopolitical scale and in terms of the national economic cost – but what about on a broader level? What does this crisis mean for global trade and cross-border supply chains? What will the impact be on the Eurozone? What will happen to the free movement of people?

All of these questions will at some stage need answering, with much of the direction on this needed from the European Union, itself. This is especially true when it comes to managing fiscal policy. None of these issues can be easily answered. Given the divisions that existed in the European Council only two months ago when it came to negotiating the new budget and the fiscal hurdles that the EU must jump over to establish a stable recovery are high.

For a start, the dreaded question of so-called ‘Eurobonds’ has raised its head again. A question that caused perhaps the most division during the earlier attempts to negotiate the ‘Multiannual Financial Framework’ (MFF). Europe’s southern members want to see them issued to aid their recovery when the crisis concludes, and yet many Northern European countries are still resistant as they know that they will end up having to guarantee the debts of any such bonds.

The leader of the conservative Fratelli d’Italia (Brothers of Italy) party recently condemned the European Commission for not having urged the European Central Bank (ECB) to restart Quantitative Easing – the act of buying government bonds or other financial assets in order to inject money into the economy to stimulate economic growth. ECB chief Christine Lagarde pointed to the fact that the Bank of England had taken similar actions, albeit by effectively offering the UK government an overdraft in the form of an extended line of credit.

Instead of opting for a traditional central banking approach, the ECB has proposed the creation of a so-called ‘Eurozone bad bank’ that could take in remaining debts from small businesses and banks, collectivising them, and then writing them off. This is in an attempt to prevent businesses in Europe from taking out loans to save themselves since they won’t realistically be able to repay their debts in the future – similar to the sub-prime mortgage crisis in 2007.

The European Commission has pushed back on the idea stating that it is not willing to bend the rules on state aid. This position was equally applied at the start of the coronavirus crisis before a push back by many member states who wanted to directly intervene in the economy. The European Commission has instead proposed that they will authorise the borrowing from the market to finance a recovery plan that will come on top of the annual budget.

Where the money will borrowed from has yet to be decided by the Commission with Commissioner Dombrovakis telling the European Parliament, “How exactly we call the borrowing remains to be discussed.” Critics have pointed out that such an action would simply add more debt to countries in Southern Europe who have been hardest hit.

Another proposal has been to increase funding to the European Investment Bank to allow it to give out favourable loans to small and medium-sized enterprises across the EU. Although there hasn’t been an overt dismissal of this idea – some in Northern Europe fear that the increased funding would fall on them.

There are, finally, broader questions – such as when Europe will be able to properly open up again. The World Health Organization has already stated that it does not believe that the time is right for people to go back to work, encouraging countries to take a phased approach. This, however, creates huge uncertainty about when businesses will be able to begin working together across borders, when employees will be able to travel, and when orders will be fulfilled.

They key, as with everything in this crisis, is patience. However, the longer Europe remains in lockdown, the harder the recovery process will be.