The coronavirus has exposed the deep divisions within the EU as they struggled to agree upon appropriate fiscal measures designed to save the bloc from the economic impact of this pandemic. On Thursday, EU finance ministers finally managed to agree upon a £438 billion support package for countries most affected by the epidemic and they will benefit from €240 billion of credit lines via the European Stability Mechanism.
The road to this agreement has not been easy. According to Reuters, the main reason for the breakdown of talks between EU finance ministers on Tuesday was a diplomatic feud between Italy and the Netherlands over what conditions should be attached to Eurozone credit for administrations battling the pandemic. This feud resulted in half a trillion euros worth of aid being blocked. This was meant to be an opportunity to move on from the fights that have shadowed the bloc over the last ten years, but Tuesday’s meeting failed to produce any groundbreaking results.
Spain, Italy and France Feel Like the EU is Not Doing Enough
The Dutch were particularly angry that the Italians wanted a reference to debt mutualization as a possible recovery instrument to be analyzed more in the future in the form of so-called “Coronabonds.”
Furthermore, Austria, Denmark and Finland also supported Holland’s stance on Coronabonds, despite the fact that German newspaper Bild, which opposed the Greek bailout ten years ago, urged the EU to help its southern members. This represents a dramatic shift in public opinion in Germany.
Spain, France and Italy already feel like the EU’s suspension of state aid limits that allowed member states to inflate their debt to spend more was not enough to help these struggling nations. The French were demanding that the bloc creates an emergency support fund issuing grants for medical supplies and healthcare.
Options Available to the EU
Other ideas that were being floated included credit lines from the Eurozone bailout fund that would be worth up to 2 percent of a country’s economic output; allowing the European Investment Bank to improve its lending by supporting companies with a further €200 billion; and to support the EU’s executive in raising €100 billion on the market.
French Finance Minister Bruno Le Maire told journalists that whilst an agreement was emerging on these three options, a fund worth “several hundred billion Euros” in joint borrowing would be sufficient to finance an economic recovery.
Is the EU moving fast enough?
ECB governing member Francois Villeroy de Galhau was quick to reassure the markets on Tuesday by saying that as the talks continued on Thursday morning, he hoped to make significant progress by that point, even if the Italians refuse to budge on Coronabonds.
Despite the fact that EU member states were able to come to an agreement on Thursday, Covid-19 has exposed the substantial economic differences between all of its participant states, and it has demonstrated how slow the bloc is in responding to economic crises.
Italians Feel Betrayed by the EU
Prior to this epidemic, Italy’s public debt was 133 percent of its GDP, or $2.3 trillion. Earlier on, a group of Italian mayors and other politicians bought a page in Germany’s Frankfurter Allgemeine Zeitung newspaper to remind Germany that it was never forced to pay back its debts after World War Two. With the League’s Matteo Salvini already taking advantage of this situation to boost his own popularity, it seems like EU resentment in Italy is only likely to surge in the long-term.
Regardless of the long-term impact of Brussels’ financial measures, many Italians are likely to remember this moment as a time when other Eurozone members failed to come to its rescue, and this will weaken the bloc’s support in Italy.